Course Reader
English 101
Fall 2013
Professor Jesse Schwartz
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Course Reader for Fall 2013 English 101
Table of Contents:
The School Days of an Indian Girl
2
Excerpt from Pedagogy of the Oppressed
5
Learning to Read and Write
14
Fast Food Nation Excerpts:
Chapter Three: Behind the Counter
18
Chapter Eight: The Most Dangerous Job
38
I Was a Warehouse Wage Slave
53
Why I Am Leaving Goldman Sachs
67
On Goldman Executive Greg Smith’s Brave Departure
70
On the Phenomenon of Bullshit Jobs
73
Why Wall Street Always Blows It
74
The Big Takeover
86
The Great American Bubble Machine
102
1
The School Days of an Indian Girl By Zitkala-sa
Chapter One
There were eight in our party of bronzed children who were going East with the
missionaries. Among us were three young braves, two tall girls, and we three little ones,
Judewin, Thowin, and I.
We had been very impatient to start on our journey to the Red Apple Country, which,
we were told, lay a little beyond the great circular horizon of the Western prairie. Under a
sky of rosy apples we dreamt of roaming as freely and happily as we had chased the
cloud shadows on the Dakota plains. We had anticipated much pleasure from a ride on
the iron horse, but the throngs of staring palefaces disturbed and troubled us.
On the train, fair women, with tottering babies on each arm, stopped their haste and
scrutinized the children of absent mothers. Large men, with heavy bundles in their hands,
halted near by, and riveted their glassy blue eyes upon us.
I sank deep into the corner of my seat, for I resented being watched. Directly in front of
me, children who were no larger than I hung themselves upon the backs of their seats,
with their bold white faces toward me. Sometimes they took their forefingers out of their
mouths and pointed at my moccasined feet. Their mothers, instead of reproving such
rude curiosity, looked closely at me, and attracted their children's further notice to my
blanket. This embarrassed me, and kept me constantly on the verge of tears.
I sat perfectly still, with my eyes downcast, daring only now and then to shoot long
glances around me. Chancing to turn to the window at my side, I was quite breathless
upon seeing one familiar object. It was the telegraph pole which strode by at short
paces. Very near my mother's dwelling, along the edge of a road thickly bordered with
wild sunflowers, some poles like these had been planted by white men. Often I had
stopped, on my way down the road, to hold my ear against the pole, and, hearing its
low moaning, I used to wonder what the paleface had done to hurt it. Now I sat
watching for each pole that glided by to be the last one.
In this way I had forgotten my uncomfortable surroundings, when I heard one of my
comrades call out my name. I saw the missionary standing very near, tossing candies
and gums into our midst. This amused us all, and we tried to see who could catch the
most of the sweetmeats. The missionary's generous distribution of candies was impressed
upon my memory by a disastrous result which followed. I had caught more than my
share of candies and gums, and soon after our arrival at the school I had a chance to
disgrace myself, which, I am ashamed to say, I did.
Though we rode several days inside of the iron horse, I do not recall a single thing
about our luncheons.
It was night when we reached the school grounds. The lights from the windows of the
large buildings fell upon some of the icicled trees that stood beneath them. We were led
toward an open door, where the brightness of the lights within flooded out over the
heads of the excited palefaces who blocked the way. My body trembled more from
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fear than from the snow I trod upon.
Entering the house, I stood close against the wall. The strong glaring light in the large
whitewashed room dazzled my eyes. The noisy hurrying of hard shoes upon a bare
wooden floor.
increased the whirring in my ears. My only safety seemed to be in keeping next to the
wall. As I was wondering in which direction to escape from all this confusion, two warm
hands grasped me firmly, and in the same moment I was tossed high in midair. A rosycheeked paleface woman caught me in her arms. I was both frightened and insulted by
such trifling. I stared into her eyes, wishing her to let me stand on my own feet, but she
jumped me up and down with increasing enthusiasm. My mother had never made a
plaything of her wee daughter. Remembering this I began to cry aloud.
They misunderstood the cause of my tears, and placed me at a white table loaded
with food. There our party were united again. As I did not hush my crying, one of the
older ones whispered to me, "Wait until you are alone in the night."
It was very little I could swallow besides my sobs, that evening.
"Oh, I want my mother and my brother Dawee! I want to go to my aunt!" I pleaded; but
the ears of the palefaces could not hear me.
From the table we were taken along an upward incline of wooden boxes, which I
learned afterward to call a stairway. At the top was a quiet hall, dimly lighted. Many
narrow beds were in one straight line down the entire length of the wall. In them lay
sleeping brown faces, which peeped just out of the coverings. I was tucked into bed with
one of the tall girls, because she talked to me in my mother tongue and seemed to
soothe me.
I had arrived in the wonderful land of rosy skies, but I was not happy, as I had thought I
should be. My long travel and the bewildering sights had exhausted me. I fell asleep,
heaving deep, tired sobs. My tears were left to dry themselves in streaks, because neither
my aunt nor my mother was near to wipe them away.
Chapter Two
The first day in the land of apples was a bitter-cold one; for the snow still covered the
ground, and the trees were bare. A large bell rang for breakfast, its loud metallic voice
crashing through the belfry overhead and into our sensitive ears. The annoying clatter of
shoes on bare floors gave us no peace. The constant clash of harsh noises, with an
undercurrent of many voices murmuring an unknown tongue, made a bedlam within
which I was securely tied. And though my spirit tore itself in struggling for its lost freedom,
all was useless.
A paleface woman, with white hair, came up after us. We were placed in a line of girls
who were marching into the dining room. These were Indian girls, in stiff shoes and closely
clinging dresses. The small girls wore sleeved aprons and shingled hair. As I walked
noiselessly in my soft moccasins, I felt like sinking to the floor, for my blanket had been
stripped from my shoulders. I looked hard at the Indian girls, who seemed not to care
that they were even more immodestly dressed than I, in their tightly fitting clothes. While
we marched in, the boys entered at an opposite door. I watched for the three young
braves who came in our party. I spied them in the rear ranks, looking as uncomfortable
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as I felt.
A small bell was tapped, and each of the pupils drew a chair from under the table.
Supposing this act meant they were to be seated, I pulled out mine and at once slipped
into it from one side. But when I turned my head, I saw that I was the only one seated,
and all the rest at our table remained standing. Just as I began to rise, looking shyly
around to see how chairs were to be used, a second bell was sounded. All were seated
at last, and I had to crawl back into my chair again. I heard a man's voice at one end of
the hall, and I looked around to see him. But all the others hung their heads over their
plates. As I glanced at the long chain of tables, I caught the eyes of a paleface woman
upon me. Immediately I dropped my eyes, wondering why I was so keenly watched by
the strange woman. The man ceased his mutterings, and then a third bell was tapped.
Every one picked up his knife and fork and began eating. I began crying instead, for by
this time I was afraid to venture anything more.
But this eating by formula was not the hardest trial in that first day. Late in the morning,
my friend Judewin gave me a terrible warning. Judewin knew a few words of English,
and she had overheard the paleface woman talk about cutting our long, heavy hair.
Our mothers had taught us that only unskilled warriors who were captured had their hair
shingled by the enemy. Among our people, short hair was worn by mourners, and
shingled hair by cowards!
We discussed our fate some moments, and when Judewin said, "We have to submit,
because they are strong," I rebelled.
"No, I will not submit! I will struggle first!" I answered.
I watched my chance, and when no one noticed I disappeared. I crept up the stairs as
quietly as I could in my squeaking shoes, -- my moccasins had been exchanged for
shoes. Along the hall I passed, without knowing whither I was going. Turning aside to an
open door, I found a large room with three white beds in it. The windows were covered
with dark green curtains, which made the room very dim. Thankful that no one was
there, I directed my steps toward the corner farthest from the door. On my hands and
knees I crawled under the bed, and cuddled myself in the dark corner.
From my hiding place I peered out, shuddering with fear whenever I heard footsteps
near by. Though in the hall loud voices were calling my name, and I knew that even
Judewin was searching for me, I did not open my mouth to answer. Then the steps were
quickened and the voices became excited. The sounds came nearer and nearer.
Women and girls entered the room. I held my breath, and watched them open closet
doors and peep behind large trunks. Some one threw up the curtains, and the room was
filled with sudden light. What caused them to stoop and look under the bed I do not
know. I remember being dragged out, though I resisted by kicking and scratching wildly.
In spite of myself, I was carried downstairs and tied fast in a chair.
I cried aloud, shaking my head all the while until I felt the cold blades of the scissors
against my neck, and heard them gnaw off one of my thick braids. Then I lost my spirit.
Since the day I was taken from my mother I had suffered extreme indignities. People had
stared at me. I had been tossed about in the air like a wooden puppet. And now my
long hair was shingled like a coward's! In my anguish I moaned for my mother, but no
one came to comfort me. Not a soul reasoned quietly with me, as my own mother used
to do; for now I was only one of many little animals driven by a herder.
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Chapter Two of Pedagogy of the Oppressed
By Paolo Friere
A careful analysis of the teacher-student relationship at any level, inside or outside the
school, reveals its fundamentally narrative character. This relationship involves a narrating
Subject (the teacher) and patient listening objects (the students). The contents, whether
values or empirical dimensions of reality, tend in the process of being narrated to
become lifeless and petrified. Education is suffering from narration sickness.
The teacher talks about reality as if it were motionless, static, compartmentalized, and
predictable. Or else he expounds on a topic completely alien to the existential
experience of the students. His task is to "fill" the students with the contents of his narration
-- contents which are detached from reality, disconnected from the totality that
engendered them and could give them significance. Words are emptied of their
concreteness and become a hollow, alienated, and alienating verbosity.
The outstanding characteristic of this narrative education, then, is the sonority of words,
not their transforming power. "Four times four is sixteen; the capital of Para is Belem." The
student records, memorizes, and repeats these phrases without perceiving what four
times four really means, or realizing the true significance of "capital" in the affirmation "the
capital of Para is Belem," that is, what Belem means for Para and what Para means for
Brazil.
Narration (with the teacher as narrator) leads the students to memorize mechanically the
narrated account. Worse yet, it turns them into "containers," into "receptacles" to be
"filled" by the teachers. The more completely she fills the receptacles, the better a
teachers she is. The more meekly the receptacles permit themselves to be filled, the
better students they are.
Education thus becomes an act of depositing, in which the students are the depositories
and the teacher is the depositor. Instead of communicating, the teacher issues
communiques and makes deposits which the students patiently receive, memorize, and
repeat. This is the "banking' concept of education, in which the scope of action allowed
to the students extends only as far as receiving, filing, and storing the deposits. They do, it
is true, have the opportunity to become collectors or cataloguers of the things they store.
But in the last analysis, it is the people themselves who are filed away through the lack of
creativity, transformation, and knowledge in this (at best) misguided system. For apart
from inquiry, apart from the praxis, individuals cannot be truly human. Knowledge
emerges only through invention and re-invention, through the restless, impatient
continuing, hopeful inquiry human beings pursue in the world, with the world, and with
each other.
In the banking concept of education, knowledge is a gift bestowed by those who
consider themselves knowledgeable upon those whom they consider to know nothing.
Projecting an absolute ignorance onto others, a characteristic of the ideology of
oppression, negates education and knowledge as processes of inquiry. The teacher
presents himself to his students as their necessary opposite; by considering their
ignorance absolute, he justifies his own existence. The students, alienated like the slave in
the Hegelian dialectic, accept their ignorance as justifying the teachers existence -- but
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unlike the slave, they never discover that they educate the teacher.
The raison d'etre of libertarian education, on the other hand, lies in its drive towards
reconciliation. Education must begin with the solution of the teacher-student
contradiction, by reconciling the poles of the contradiction so that both are
simultaneously teachers and students.
This solution is not (nor can it be) found in the banking concept. On the contrary, banking
education maintains and even stimulates the contradiction through the following
attitudes and practices, which mirror oppressive society as a whole:
•
•
•
•
•
•
•
the teacher teaches and the students are taught;
the teacher knows everything and the students know nothing;
the teacher thinks and the students are thought about;
the teacher talks and the students listen -- meekly;
the teacher disciplines and the students are disciplined;
the teacher chooses and enforces his choice, and the students comply;
the teacher acts and the students have the illusion of acting through the action of the
teacher;
• the teacher chooses the program content, and the students (who were not consulted)
adapt to it;
• the teacher confuses the authority of knowledge with his or her own professional
authority, which she and he sets in opposition to the freedom of the students;
• the teacher is the Subject of the learning process, while the pupils are mere objects.
It is not surprising that the banking concept of education regards men as adaptable,
manageable beings. The more students work at storing the deposits entrusted to them,
the less they develop the critical consciousness which would result from their intervention
in the world as transformers of that world. The more completely they accept the passive
role imposed on them, the more they tend simply to adapt to the world as it is and to the
fragmented view of reality deposited in them.
The capability of banking education to minimize or annul the student's creative power
and to stimulate their credulity serves the interests of the oppressors, who care neither to
have the world revealed nor to see it transformed. The oppressors use their
"humanitarianism" to preserve a profitable situation. Thus they react almost instinctively
against any experiment in education which stimulates the critical faculties and is not
content with a partial view of reality always seeks out the ties which link one point to
another and one problem to another.
Indeed, the interests of the oppressors lie in "changing the consciousness of the
oppressed, not the situation which oppresses them," (1) for the more the oppressed can
be led to adapt to that situation, the more easily they can be dominated. To achieve this
the oppressors use the banking concept of education in conjunction with a paternalistic
social action apparatus, within which the oppressed receive the euphemistic title of
"welfare recipients." They are treated as individual cases, as marginal persons who
deviate from the general configuration of a "good, organized and just" society. The
oppressed are regarded as the pathology of the healthy society which must therefore
adjust these "incompetent and lazy" folk to its own patterns by changing their mentality.
These marginals need to be "integrated," "incorporated" into the healthy society that
they have "forsaken."
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The truth is, however, that the oppressed are not "marginals," are not living "outside"
society. They have always been "inside" the structure which made them "beings for
others." The solution is not to 'integrate" them into the structure of oppression, but to
transform that structure so that they can become "beings for themselves." Such
transformation, of course, would undermine the oppressors' purposes; hence their
utilization of the banking concept of education to avoid the threat of student
conscientizacao.
The banking approach to adult education, for example, will never propose to students
that they critically consider reality. It will deal instead with such vital questions as whether
Roger gave green grass to the goat, and insist upon the importance of learning that, on
the contrary, Roger gave green grass to the rabbit. The "humanism" of the banking
approach masks the effort to turn women and men into automatons -- the very negation
of their ontological vocation to be more fully human.
Those who use the banking approach, knowingly or unknowingly (for there are
innumerable well-intentioned bank-clerk teachers who do not realize that they are
serving only to dehumanize), fail to perceive that the deposits themselves contain
contradictions about reality. But sooner or later, these contradictions may lead formerly
passive students to turn against their domestication and the attempt to domesticate
reality. They may discover through existential experience that their present way of life is
irreconcilable with their vocation to become fully human. They may perceive through
their relations with reality that reality is really a process, undergoing constant
transformation. If men and women are searchers and their ontological vocation is
humanization, sooner or later they may perceive the contradiction in which banking
education seeks to maintain them, and then engage themselves in the struggle for their
liberation.
But the humanist revolutionary educator cannot wait for this possibility to materialize.
From the outset, her efforts must coincide with those of the students to engage in critical
thinking and the quest for mutual humanization. His efforts must be imbued with a
profound trust in people and their creative power. To achieve this, they must be partners
of the students in their relations with them.
The banking concept does not admit to such partnership -- and necessarily so. To resolve
the teacher-student contradiction, to exchange the role of depositor, prescriber,
domesticator, for the role of student among students would be to undermine the power
of oppression and serve the cause of liberation.
Implicit in the banking concept is the assumption of a dichotomy between human
beings and the world: a person is merely in the world, not with the world or with others;
the individual is spectator, not re-creator. In this view, the person is not a conscious being
(corpo consciente); he or she is rather the possessor of a consciousness: an empty "mind"
passively open to the reception of deposits of reality from the world outside. For example,
my desk, my books, my coffee cup, all the objects before me, -- as bits of the world
which surround me -- would be "inside" me, exactly as I am inside my study right now. This
view makes no distinction between being accessible to consciousness and entering
consciousness. The distinction, however, is essential: the objects which surround me are
simply accessible to my consciousness, not located within it. I am aware of them, but
they are not inside me.
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It follows logically from the banking notion of consciousness that the educator's role is to
regulate the way the world "enters into" the students. The teacher's task is to organize a
process which already occurs spontaneously, to "fill" the students by making deposits of
information which he of she considers to constitute true knowledge. (2) And since people
"receive" the world as passive entities, education should make them more passive still,
and adapt them to the world. The educated individual is the adapted person, because
she or he is better 'fit" for the world. Translated into practice, this concept is well suited for
the purposes of the oppressors, whose tranquility rests on how well people fit the world
the oppressors have created and how little they question it.
The more completely the majority adapt to the purposes which the dominant majority
prescribe for them (thereby depriving them of the right to their own purposes), the more
easily the minority can continue to prescribe. The theory and practice of banking
education serve this end quite efficiently. Verbalistic lessons, reading requirements, (3)
the methods for evaluating "knowledge," the distance between the teacher and the
taught, the criteria for promotion: everything in this ready-to-wear approach serves to
obviate thinking.
The bank-clerk educator does not realize that there is no true security in his hypertrophied
role, that one must seek to live with others in solidarity. One cannot impose oneself, nor
even merely co-exist with one's students. Solidarity requires true communication, and the
concept by which such an educator is guided fears and proscribes communication.
Yet only through communication can human life hold meaning. The teacher's thinking is
authenticated only by the authenticity of the students' thinking. The teacher cannot think
for her students, nor can she impose her thought on them. Authentic thinking, thinking
that is concerned about reality, does not take place in ivory tower isolation, but only in
communication. If it is true that thought has meaning only when generated by action
upon the world, the subordination of students to teachers becomes impossible.
Because banking education begins with a false understanding of men and women as
objects, it cannot promote the development of what Fromm calls "biophily," but instead
produces its opposite: "necrophily."
While life is characterized by growth in a structured functional manner, the necrophilous
person loves all that does not grow, all that is mechanical. The necrophilous person is
driven by the desire to transform the organic into the inorganic, to approach life
mechanically, as if all living persons were things. . . . Memory, rather than experience;
having, rather than being, is what counts' The necrophilous person can relate to an
object -- a flower or a person -- only if he possesses it; hence a threat to his possession is a
threat to himself, if he loses possession he loses contact with the world. . . . He loves
control, and in the act of controlling he kills life. (4)
Oppression --overwhelming control -- is necrophilic; it is nourished by love of death, not
life. The banking concept of education, which serves the interests of oppression, is also
necrophilic. Based on a mechanistic, static, naturalistic, spatialized view of
consciousness, it transforms students into receiving objects. It attempts to control thinking
and action, leads women and men to adjust to the world, and inhibits their creative
power.
When their efforts to act responsibly are frustrated, when they find themselves unable to
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use their faculties, people suffer. "This suffering due to impotence is rooted in the very fact
that the human has been disturbed." (5) But the inability to act which people's anguish
also causes them to reject their impotence, by attempting “. . . .to restore [their]
capacity to act. But can [they], and how? One way is to submit to and identify with a
person or group having power. By this symbolic participation in another person's life,
(men have] the illusion of acting, when in reality [they] only submit to and become a part
of those who act.” (6)
Populist manifestations perhaps best exemplify this type of behavior by the oppressed,
who, by identifying with charismatic leaders, come to feel that they themselves are
active and effective. The rebellion they express as they emerge in the historical process is
motivated by that desire to act effectively. The dominant elites consider the remedy to
be more domination and repression, carried out in the name of freedom, order, and
social peace (that is, the peace of the elites). Thus they can condemn -- logically, from
their point of view -- "the violence of a strike by workers and [can] call upon the state in
the same breath to use violence in putting down the strike." (7)
Education as the exercise of domination stimulates the credulity of students, with the
ideological intent (often not perceived by educators) of indoctrinating them to adapt to
the world of oppression. This accusation is not made in the naive hope that the dominant
elites will thereby simply abandon the practice. Its objective is to call the attention of true
humanists to the fact that they cannot use banking educational methods in the pursuit of
liberation, for they would only negate that very pursuit. Nor may a revolutionary society
inherit these methods from an oppressor society. The revolutionary society which
practices banking education is either misguided or mistrusting of people. In either event,
it is threatened by the specter of reaction.
Unfortunately, those who espouse the cause of liberation are themselves surrounded and
influenced by the climate which generates the banking concept, and often do not
perceive its true significance or its dehumanizing power. Paradoxically, then, they utilize
this same instrument of alienation in what they consider an effort to liberate. Indeed,
some "revolutionaries" brand as "innocents," "dreamers," or even "reactionaries" those
who would challenge this educational practice. But one does not liberate people by
alienating them. Authentic liberation-the process of humanization-is not another deposit
to be made in men. Liberation is a praxis: the action and reflection of men and women
upon their world in order to transform it.
Those truly committed to liberation must reject the banking concept in its entirety,
adopting instead a concept of women and men as conscious beings, and
consciousness as consciousness intent upon the world. They must abandon the
educational goal of deposit-making and replace it with the posing of the problems of
human beings in their relations with the world. "Problem-posing" education, responding to
the essence of consciousness --intentionality -- rejects communiques and embodies
communication. It epitomizes the special characteristic of consciousness: being
conscious of, not only as intent on objects but as turned in upon itself in a Jasperian split"
--consciousness as consciousness of consciousness.
Liberating education consists in acts of cognition, not transferals of information. It is a
learning situation in which the cognizable object (far from being the end of the cognitive
act) intermediates the cognitive actors -- teacher on the one hand and students on the
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other. Accordingly, the practice of problem-posing education entails at the outset that
the teacher-student contradiction to be resolved. Dialogical relations -- indispensable to
the capacity of cognitive actors to cooperate in perceiving the same cognizable object
--are otherwise impossible.
Indeed problem-posing education, which breaks with the vertical characteristic of
banking education, can fulfill its function of freedom only if it can overcome the above
contradiction. Through dialogue, the teacher-of-the-students and the students-of-theteacher cease to exist and a new term emerges: teacher-student with students-teachers.
The teacher is no longer merely the-one-who-teaches, but one who is himself taught in
dialogue with the students, who in turn while being taught also teach. They become
jointly responsible for a process in which all grow. In this process, arguments based on
"authority" are no longer valid; in order to function authority must be on the side of
freedom, not against it. Here, no one teaches another, nor is anyone self-taught. People
teach each other, mediated by the world, by the cognizable objects which in banking
education are "owned" by the teacher.
The banking concept (with its tendency to dichotomize everything) distinguishes two
stages in the action of the educator. During the first he cognizes a cognizable object
while he prepares his lessons in his study or his laboratory; during the second, he
expounds to his students about that object. The students are not called upon to know,
but to memorize the contents narrated by the teacher. Nor do the students practice any
act of cognition, since the object towards which that act should be directed is the
property of the teacher rather than a medium evoking the critical reflection of both
teacher and students. Hence in the name of the "preservation of and knowledge" we
have a system which achieves neither true knowledge nor true culture.
The problem-posing method does not dichotomize the activity of teacher-student: she is
not "cognitive" at one point and "narrative" at another. She is always "cognitive," whether
preparing a project or engaging in dialogue with the students. He does not regard
objects as his private property, but as the object of reflection by himself and his students.
In this way, the problem-posing educator constantly re-forms his reflections in the
reflection of the students. The students -- no longer docile listeners -- are now--critical coinvestigators in dialogue with the teacher. The teacher presents the material to the
students for their consideration, and re-considers her earlier considerations as the
students express their own. The role of the problem-posing educator is to create,
together with the students, the conditions under which knowledge at the level of the
doxa is superseded by true knowledge at the level of the logos. Whereas banking
education anesthetizes and inhibits creative power, problem-posing education involves
a constant unveiling of reality. The former attempts to maintain the submersion of
consciousness; the latter strives for the emergence of consciousness and critical
intervention in reality.
Students, as they are increasingly posed with problems relating to themselves in the world
and with the world, will feel increasingly challenged and obliged to respond to that
challenge. Because they apprehend the challenge as interrelated to other problems
within a total context not as a theoretical question, the resulting comprehension tends to
be increasingly critical and thus constantly less alienated. Their response to the challenge
evokes new challenges, followed by new understandings; and gradually the students
come to regard themselves as committed.
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Education as the practice of freedom -- as opposed to education as the practice of
domination -- denies that man is abstract, isolated, independent and unattached to the
world; it also denies that the world exists as a reality apart from people. Authentic
reflection considers neither abstract man nor the world without people, but people in
their relations with the world. In these relations consciousness and world are simultaneous:
consciousness neither precedes the world nor follows it.
La conscience et le monde sont dormes dun meme coup: exterieur par essence a la
conscience, le monde est, par essence relatif a elle. (8)
In one of our culture circles in Chile, the group was discussing (based on a codification)
the anthropological concept of culture. In the midst of the discussion, a peasant who by
banking standards was completely ignorant said: "Now I see that without man there is no
world." When the educator responded: "Let's say, for the sake of argument, that all the
men on earth were to die, but that the earth remained, together with trees, birds,
animals, rivers, seas, the stars. . . wouldn't all this be a world?" "Oh no," the peasant
replied . "There would be no one to say: 'This is a world'."
The peasant wished to express the idea that there would be lacking the consciousness of
the world which necessarily implies the world of consciousness. I cannot exist without a
non-I. In turn, the not-I depends on that existence. The world which brings consciousness
into existence becomes the world of that consciousness. Hence, the previously cited
affirmation of Sartre: "La conscience et le monde sont dormes d'un meme coup."
As women and men, simultaneously reflecting on themselves and world, increase the
scope of their perception, they begin to direct their observations towards previously
inconspicuous phenomena:
In perception properly so-called, as an explicit awareness [Gewahren], I am turned
towards the object, to the paper, for instance. I apprehend it as being this here and
now. The apprehension is a singling out, every object having a background in
experience. Around and about the paper lie books, pencils, inkwell and so forth, and
these in a certain sense are also "perceived," perceptually there, in the "field of intuition";
but whilst I was turned towards the paper there was no turning in their direction, nor any
apprehending of them, not even in a secondary sense. They appeared and yet were not
singled out, were posited on their own account. Every perception of a thing has such a
zone of background intuitions or background awareness, if "intuiting" already includes
the state of being turned towards, and this also is a "conscious experience", or more
briefly a "consciousness of" all indeed that in point of fact lies in the co-perceived
objective background. (10)
That which had existed objectively but had not been perceived in its deeper implications
(if indeed it was perceived at all) begins to "stand out," assuming the character of a
problem and therefore of challenge. Thus, men and women begin to single out elements
from their "background awareness" and to reflect upon them. These elements are now
objects of their consideration, and, as such, objects of their action and cognition.
In problem-posing education, people develop their power to perceive critically the way
they exist in the world with which and in which they find themselves; they come to see
the world not as a static reality, but as a reality in process, in transformation. Although the
11
dialectical relations of women and men with the world exist independently of how these
relations are perceived (or whether or not they are perceived at all), it is also true that
the form of action they adopt is to a large extent a function of how they perceive
themselves in the world. Hence, the teacher-student and the students-teachers reflect
simultaneously on themselves and the world without dichotomizing this reflection from
action, and thus establish an authentic form of thought and action.
Once again, the two educational concepts and practices under analysis come into
conflict. Banking education (for obvious reasons) attempts, by mythicizing reality, to
conceal certain facts which explain the way human beings exist in the world; problemposing education sets itself the task of demythologizing. Banking education resists
dialogue; problem-posing education regards dialogue as indispensable to the act of
cognition which unveils reality. Banking education treats students as objects of
assistance; problem-posing education makes them critical thinkers. Banking education
inhibits creativity and domesticates (although it cannot completely destroy) the
intentionality of consciousness by isolating consciousness from the world, thereby
denying people their ontological and historical vocation of becoming more fully human.
Problem-posing education bases itself on creativity and stimulates true reflection and
action upon reality, thereby responding to the vocation of persons as beings only when
engaged in inquiry and creative transformation. In sum: banking theory and practice, as
immobilizing and fixating forces, fail to acknowledge men and women as historical
beings; problem-posing theory and practice take the people's historicity as their starting
point.
Problem-posing education affirms men and women as beings the process of becoming - as unfinished, uncompleted beings in and with a likewise unfinished reality. Indeed, in
contrast to other animals who are unfinished, but not historical, people know themselves
to be unfinished; they are aware of their incompletion. In this incompletion and this
awareness lie the very roots of education as an human manifestation. The unfinished
character of human beings and the transformational character of reality necessitate
that education be an ongoing activity.
Education is thus constantly remade in the praxis. In order to be, it must become. Its
"duration" (in the Bergsonian meaning of the word) is found in the interplay of the
opposites permanence and change. The banking method emphasizes permanence
and becomes problem-posing education -- which accepts neither a "well-behaved"
present nor a predetermined future -- roots itself in the dynamic present and becomes
revolutionary.
Problem-posing education is revolutionary futurity. Hence it is prophetic (and as such,
hopeful). Hence, it corresponds to the historical nature of humankind. Hence, it affirms
women and men as who transcend themselves, who move forward and look ahead, for
whom immobility represents a fatal threat for whom looking at the past must only be a
means of understanding more clearly what and who they are so that they can more
wisely build the future. Hence, it identifies with the movement which engages people as
beings aware of their incompletion -- an historical movement which has its point of
departure, its Subjects and its objective.
The point of departure of the movement lies in the people themselves. But since people
do not exist apart from the world, apart from reality, the movement must begin with the
human-world relationship. Accordingly, the point of departure must always be with men
12
and women in the "here and now," which constitutes the situation within which they are
submerged, from which they emerge, and in which they intervene. Only by starting from
this situation -- which determines their perception of it -- can they begin to move. To do
this authentically they must perceive their state not as fated and unalterable, but merely
as limiting - and therefore challenging.
Whereas the banking method directly or indirectly reinforces men's fatalistic perception
of their situation, the problem-posing method presents this very situation to them as a
problem. As the situation becomes the object of their cognition, the naive or magical
perception which produced their fatalism gives way to perception which is able to
perceive itself even as it perceives reality, and can thus be critically objective about that
reality.
A deepened consciousness of their situation leads people to apprehend that situation as
an historical reality susceptible of transformation. Resignation gives way to the drive for
transformation and inquiry, over which men feel themselves to be in control. If people, as
historical beings necessarily engaged with other people in a movement of inquiry, did
not control that movement, it would be (and is) a violation of their humanity. Any
situation in which some individuals prevent others from engaging in the process of inquiry
is one of violence. The means used are not important; to alienate human beings from
their own decision-making is to change them into objects.
This movement of inquiry must be directed towards humanization -- the people's historical
vocation. The pursuit of full humanity, however, cannot be carried out in isolation or
individualism, but only in fellowship and solidarity; therefore it cannot unfold in the
antagonistic relations between oppressors and oppressed. No one can be authentically
human while he prevents others from being so. Attempting to be more human,
individualistically, leads to having more, egotistically, a form of dehumanization. Not that
it is not fundamental to have in order to be human. Precisely because it is necessary,
some men's having must not be allowed to constitute an obstacle to others' having, must
not consolidate the power of the former to crush the latter.
Problem-posing education, as a humanist and liberating praxis, posits as fundamental
that the people subjected to domination must fight for their emancipation. To that end, it
enables teachers and students to become Subjects of the educational process by
overcoming authoritarianism and an alienating intellectualism; it also enables people to
overcome their false perception of reality. The world -- no longer something to be
described with deceptive words -- becomes the object of that transforming action by
men and women which results in their humanization.
Problem-posing education does not and cannot serve the interests of the oppressor. No
oppressive order could permit the oppressed to begin to question: Why? While only a
revolutionary society can carry out this education in systematic terms, the revolutionary
leaders need not take full power before they can employ the method. In the
revolutionary process, the leaders cannot utilize the banking method as an interim
measure, justified on grounds of expediency, with intention of later behaving in a
genuinely revolutionary fashion. They must be revolutionary -- that is to say, dialogical -from the outset.
13
Learning to Read and Write
by Frederick Douglass
I lived in Master Hugh's family about seven years. During this time, I succeeded in learning
to read and write. In accomplishing this, I was compelled to resort to various stratagems. I
had no regular teacher. My mistress, who had kindly commenced to instruct
me, had, in compliance with the advice and direction of her husband, not only ceased
to instruct, but had set her face against my being instructed by anyone else. It is due,
however, to my mistress to say of her, that she did not adopt this course of treatment
immediately. She at first lacked the depravity indispensable to shutting me up in mental
darkness. It was at least necessary for her to have some training in the exercise of
irresponsible power, to make her equal to the task of treating me as though I were a
brute.
My mistress was, as I have said, a kind and tender‐hearted woman; and in the simplicity
of her soul she commenced, when I first went to live with her, to treat me as she
supposed one human being ought to treat another. In entering upon the duties of a
slaveholder, she did not seem to perceive that I sustained to her the relation of a mere
chattel, and that for her to treat me as a human being was not only wrong, but
dangerously so. Slavery proved as injurious to her as it did to me. When I went there, she
was a pious, warm, and tender‐hearted woman. There was no sorrow or suffering for
which she had not a tear. She had bread for the hungry, clothes for the naked, and
comfort for every mourner that came within her reach. Slavery soon proved its ability to
divest her of these heavenly qualities. Under its influence, the tender heart became
stone, and the lamb‐Iike disposition gave way to one of tiger‐like fierce‐ ness. The first
step in her downward course was in her ceasing to instruct me. She now commenced to
practice her husband's precepts. She finally became even more violent in her opposition
than her husband himself. She was not satisfied with simply doing as well as he had
commanded; she seemed anxious to do better. Nothing seemed to make her more
angry than to see me with a newspaper. She seemed to think that here lay the danger. I
have had her rush at me with a face made all up of fury, and snatch from me a
newspaper, in a manner that fully revealed her apprehension. She was an apt woman;
and a little experience soon demonstrated, to her satisfaction, that education and
slavery were incompatible with each other.
From this time I was most narrowly watched. If I was in a separate room any considerable
length of time, I was sure to be suspected of having a book, and was at once called to
give an account of myself. All this, however, was too late. The first step had been taken.
Mistress, in teaching me the alphabet, had given me the inch, and no precaution could
prevent me from taking the ell. The plan which I adopted, and the one by which I was
most successful, was that of making friends of all the little white boys whom I met in the
street. As many of these as I could, I converted into teachers. With their kindly aid,
obtained at different times and in different places, I finally succeeded in learning to
read. When I was sent to errands, I always took my book with me, and by doing one part
of my errand quickly, I found time to get a lesson before my return. I used also to carry
bread with me, enough of which was always in the house, and to which I was always
welcome; for I was much better off in this regard than many of the poor white children in
our neighborhood. This bread I used to bestow upon the hungry little urchins, who, in
return, would give me that more valuable bread of knowledge. I am strongly tempted to
give the names of two or three of those little boys, as a testimonial of the gratitude and
affection I bear them; but prudence forbids‐not that it would injure me, ~ but it might
embarrass them; for it is almost an unpardonable offense to teach slaves to read in this
14
Christian country. It is enough to say of the dear little fellows, that they lived on Philpot
Street, very near Durgin and Bailey's shipyard. I used to talk this matter of slavery over with
them. I would sometimes say to them, I wished I could be as free as they would be when
they got to be men. "You will be free as soon as you are twenty‐ one, but I am a slave for
life! Have not I as good a right to be free as you have?" These words used to trouble
them; they would express for me the liveliest sympathy, and console me with the hope
that something would occur by which I might be free.
I was now about twelve‐years‐old, and the thought of being a slave for life began to
bear heavily upon my heart. Just about this time, I got hold of a book entitled "The
Columbian Orator." Every opportunity I got, I used to read this book. Among much of
other interesting matter, I found in it a dialogue between a master and his slave. The
slave was represented as having run away from his master three times. The dialogue
represented the conversation which took place between them, when the slave was
retaken the third time. In this dialogue, the whole argument in behalf of slavery was
brought forward by the master, all of which was disposed of by the slave. The slave was
made to say some very smart as, well as impressive things in reply to his master‐things
which had the desired though unexpected effect; for the conversation resulted in the
voluntary emancipation of the slave on the part of the master.
In the same book, I met with one of Sheridan's mighty speeches on and in behalf of
Catholic emancipation. These were choice documents to me. I read them over and
over again with unabated interest. They gave tongue to interesting thoughts of my own
soul, which had frequently flashed through my mind, and died away for want of
utterance. The moral which I gained from the dialogue was the power of truth over the
conscience of even a slaveholder. What I got from Sheridan was a bold denunciation of
slavery, and a powerful vindication of human rights. The reading of these documents
enabled me to utter my thoughts, and to meet the arguments brought forward to sustain
slavery; but while they relieved me of one difficulty, they brought on another even more
painful than the one of which I was relieved. The more I read, the more I was led to
abhor and detest my enslavers. I could regard them in no other light than a band of
successful robbers, who had left their homes, and gone to Africa, and stolen us from our
homes, and in a strange land reduced us to slavery. I loathed them as being the
meanest as well as the most wicked of men. As I read and contemplated the subject,
behold that very discontentment which Master Hugh had predicted would follow my
learning to read had already come, to torment and sting my soul to unutterable anguish.
As I writhed under it, I would at times feel that learning to read had been a curse rather
than a blessing. It had given me a view of my wretched condition, without the remedy. It
opened my eyes to the horrible pit, but to no ladder upon which to get out. In moments
of agony, I envied my fellow‐slaves for their stupidity. I have often wished myself a beast. I
preferred the condition of the meanest reptile to my own. Anything, no matter what, to
get rid of thinking! It was this everlasting thinking of my condition that tormented me.
There was no getting rid of it. It was pressed upon me by every object within sight or
hearing, animate or inanimate. The silver trump of freedom had roused my soul to eternal
wakefulness. Freedom now appeared, to disappear no more forever. It was heard in
every sound, and seen in every thing. It was ever present to torment me with a sense of
my wretched condition. I saw nothing without seeing it, I heard nothing without hearing
it, and felt nothing without feeling it. It looked from every star, it smiled in every calm,
breathed in every wind, and moved in every storm.
I often found myself regretting my own existence, and wishing myself dead; and but for
15
the hope of being free, I have no doubt but that I should have killed myself, or done
something for which I should have been killed. While in this state of mind, I was eager to
hear anyone speak of slavery .I was a ready listener. Every little while, I could hear
something about the abolitionists. It was some time before I found what the word meant.
It was always used in such connections as to make it an interesting word to me. If a slave
ran away and succeeded in getting clear, or if a slave killed his master, set fire to a barn,
or did anything very wrong in the mind of a slaveholder, it was spoken of as the fruit of
abolition. Hearing the word in this connection very often, I set about learning what it
meant. The dictionary afforded me little or no help. I found it was "the act of abolishing";
but then I did not know what was to be abolished. Here I was perplexed. I did not dare to
ask anyone about its meaning, for I was satisfied that it was something they wanted me
to know very little about. After a patient waiting, I got one of our city papers, containing
an account of the number of petitions from the North, praying for the abolition of slavery
in the District of Columbia, and of the slave trade between the States. From this time I
understood the words abolition and abolitionist, and always drew near when that word
was spoken, expecting to hear something of importance to myself and fellow‐slaves. The
light broke in upon me by degrees. I went one day down on the wharf of Mr. Waters; and
seeing two Irishmen unloading a scow of stone, I went, unasked, and helped them.
When we had finished, one of them came to me and asked me if I were a slave. I told
him I was. He asked, " Are ye a slave for life?" I told him that I was. The good Irishman
seemed to be deeply affected by the statement. He said to the other that it was a pity
so fine a little fellow as myself should be a slave for life. He said it was a shame to hold
me. They both advised me to run away to the North; that I should find friends there, and
that I should be free. I pretended not to be interested in what they said, and treated
them as if I did not understand them; for I feared they might be treacherous. White men
have been known to encourage slaves to escape, and then, to get the reward, catch
them and return them to their masters. I was afraid that these seemingly good men might
use me so; but I nevertheless remembered their advice, and from that time I resolved to
run away. I looked forward to a time at which it would be safe for me to escape. I was
too young to think of doing so immediately; besides, I wished to learn how to write, as I
might have occasion to write my own pass. I consoled myself with the hope that I should
one day find a good chance. Meanwhile, I would learn to write.
The idea as to how I might learn to write was suggested to me by being in Durgin and
Bailey's ship‐yard, and frequently seeing the ship carpenters, after hewing, and getting a
piece of timber ready for use, write on the timber the name of that part of the ship for
which it was intended. When a piece of timber was intended for the larboard side, it
would be marked thus‐"L." When apiece was for the starboard side, it would be marked
thus‐‐S.F." A piece for the larboard side forward, would be marked thus‐"L.F." When
apiece was for starboard side forward, it would be marked thus‐"S.F." For larboard aft, it
would be marked thus‐"L.A." For starboard aft, it would be marked thus‐"S.A." I soon
learned the names of these letters, and for what they were intended when placed upon
a piece of timber in the shipyard. I immediately commenced copying them, and in a
short time was able to make the four letters named. After that, when I met with any boy
who I knew could write, I would tell him I could write as well as he. The next word would
be, "1 don't believe you. Let me see you try it." I would then make the letters which I had
been so fortunate as to learn, and ask him to beat that. In this way I got a good many
lessons in writing, which it is quite possible I should never have gotten in any other way.
During this time, my copy‐ book was the board fence, brick wall, and pavement; my pen
and ink was a lump of chalk. With these, I learned mainly how to write. I then
commenced and continued copying the Italics in Webster's Spelling Book, until I could
16
make them all without looking in the book. By this time, my little Master Thomas had gone
to school, and learned how to write, and had written over a number of copy‐books.
These had been brought home, and shown to some of our near neighbors, and then laid
aside. My mistress used to go to class meeting at the Wilk Street meeting‐house every
Monday afternoon, and leave me to take care of the house. When left thus, I used to
spend the time in writing in the spaces left in master Thomas's copy‐book, copying what
he had written. I continued to do this until I could write a hand very similar to that of
Master Thomas. Thus, after a long, tedious effort for years, I finally succeeded in learning
how to write.
17
Fast Food Nation (Chapters 3, 5, and 8)
By Eric Schlosser
3. Behind the Counter
THE VIEW OF COLORADO SPRINGS from Gold Camp Road is spectacular. The old road
takes you from the city limits to Cripple Creek, once a gold mining town with real
outlaws, now an outpost of casino gambling full of one-armed bandits and day-trippers
from Aurora. The tourist buses drive to Cripple Creek on Highway 67, which is paved.
Gold Camp Road is a dirt road through the foothills of Pikes Peak, a former wagon trail
that has narrow hairpin turns, no guardrails, and plenty of sheer drops. For years, kids from
Cheyenne Mountain High School have come up here on weekend nights, parked at
spots with good aerial views, and partied. On a clear night the stars in the sky and the
lights of the city seem linked, as though one were reflecting the other. The cars and
trucks on Interstate 25, heading north to Denver and south toward Pueblo, are tiny, slowmoving specks of white. The lights dwindle as the city gives way to the plains; at the
horizon the land looks darker than the sky. The great beauty of this scene is diminished
when the sun rises and you can clearly see what’s happening down below.
Driving through the neighborhoods of Colorado Springs often seems like passing through
layers of sedimentary rock, each one providing a snapshot of a different historical era.
Downtown Colorado Springs still has an old-fashioned, independent spirit. Aside from a
Kinko’s, a Bruegger’s Bagel Bakery, a Subway, and a couple of Starbucks, there are no
chain stores, not a single Gap in sight. An eclectic mixture of locally owned businesses
line Tejon Street, the main drag. The Chinook Bookshop, toward the north end, is as
fiercely independent as they come — the sort of literate and civilized bookstore going
out of business nationwide. Further down Tejon there’s an ice cream parlor named
Michelle’s that has been in business for almost fifty years and, around the corner, there’s
a western wear shop called Lorig’s that’s outfitted local ranchers since 1932. An old
movie palace, nicknamed “the Peak” and renovated with lots of neon, has a funky
charm that could never be mass produced. But when you leave downtown and drive
northeast, you head toward a whole new world.
The north end of the city near Colorado College is full of old Victorian houses and
Mission-style bungalows from the early part of this century. Then come Spanish-style and
adobe houses that were popular between the world wars. Then come split-level colonials
and ranch- style houses from the Leave It to Beaver era, small, modest, cheery homes.
Once you hit Academy Boulevard, you are surrounded by the hard, tangible evidence
of what has happened in Colorado during the last twenty years. Immense subdivisions
with names like Sagewood, Summerfield, and Fairfax Ridge blanket the land, thousands
upon thousands of nearly identical houses — the architectural equivalent of fast food —
covering the prairie without the slightest respect for its natural forms, built on hilltops and
ridgetops, just begging for a lightning strike, ringed by gates and brick walls and puny,
newly planted trees that bend in the wind. The houses seem not to have been
constructed by hand but manufactured by some gigantic machine, cast in the same
mold and somehow dropped here fully made. You can easily get lost in these new
subdivisions, lost for hours passing from Nor’wood, to Briargate, to Stetson Hills, from
Antelope Meadows to Chapel Ridge, without ever finding anything of significance to
differentiate one block from another — except their numbers. Roads end without
warning, and sidewalks run straight into the prairie, blocked by tall, wild grasses that have
not yet been turned into lawns.
18
Academy Boulevard lies at the heart of the new sprawl, serving as its main north-south
artery. Every few miles, clusters of fast food joints seem to repeat themselves, Burger
Kings, Wendy’s, and McDonald’s, Subways, Pizza Huts, and Taco Bells, they keep
appearing along the road, the same buildings and signage replaying like a tape loop.
You can drive for twenty minutes, pass another fast food cluster, and feel like you’ve
gotten nowhere. In the bumper-to-bumper traffic of the evening rush hour, when the
cars and the pavement and the strip malls are bathed in twilight, when the mountains in
the distance are momentarily obscured, Academy Boulevard looks just like Harbor
Boulevard in Anaheim, except newer. It looks like countless other retail strips in Orange
County — and the resemblance is hardly coincidental.
space mountain
THE NEW HOUSING DEVELOPMENTS in Colorado Springs not only resemble those of
southern California, they are inhabited by thousands of people who’ve recently left
California. An entire way of life, along with its economic underpinnings, has been
transposed from the West Coast to the Rockies. Since the early 1990s Colorado Springs
has been one of the fastest-growing cities in the nation. Since the early 1990s Colorado
Springs has been one of the fastest-growing cities in the nation. The mountains, clear air,
wide-open spaces, and unusually mild climate have drawn people tired of the traffic,
crime, and pollution elsewhere. About a third of the city’s inhabitants have lived there
less than five years. In many ways Colorado Springs today is what Los Angeles was fifty
years ago — a mecca for the disenchanted middle class, a harbinger of cultural trends,
a glimpse of the future. Since 1970 the population of the Colorado Springs metropolitan
area has more than doubled, reaching about half a million. The city is now an exemplar
of low-density sprawl. Denver’s population is about four times larger, and yet Colorado
Springs covers more land.
Much like Los Angeles, Colorado Springs was a sleepy tourist town in the early part of the
twentieth century, an enclave of wealthy invalids and retirees, surrounded by ranchland.
Nicknamed “Little London,” the city was a playground for the offspring of eastern
financiers, penniless aristocrats, and miners who’d struck it rich in Cripple Creek. The
town’s leading attractions were the Broadmoor Hotel and the Garden of the Gods, an
assortment of large rock formations. During the Great Depression, tourism plummeted,
people moved away, and about one-fifth of the city’s housing sat vacant. The outbreak
of World War II provided a great economic opportunity. Like Los Angeles, Colorado
Springs soon became dependent on military spending. The opening of Camp Carson
and Peterson Army Air Base brought thou- sands of troops to the area, along with a
direct capital investment of $30 million and an annual payroll of twice that amount. After
the war, Colorado Springs gained a series of new military bases, thanks to its strategic
location (midcontinent, beyond the range of Soviet bombers), its fine weather, and the
friendships formed between local businessmen and air force officers at the Broadmoor. In
1951, the Air Defense Command moved to the city, eventually becoming the North
American Aerospace Command, with its outpost deep within Cheyenne Mountain.
Three years later, 18,000 acres north of town were chosen as the site of the new Air Force
Academy. The number of army and air force personnel stationed in Colorado Springs
subsequently grew to be larger than the city’s entire population before World War II.
Although the local economy is far more diversified today, nearly half the jobs in Colorado
Springs still depend upon military spending. During the 1990s, while major bases were
being shut down across the country, new facilities kept opening in Colorado Springs.
Much of the Star Wars antimissile defense system is being designed and tested at
19
Schriever Air Force Base, a dozen miles east of the city. And Peterson Air Force Base now
houses one of America’s newest and most high-tech units — the Space Command. It
launches, operates, and defends America’s military satellites. It tests, maintains, and
upgrades the nation’s ballistic missiles. And it guides research on exotic space-based
weaponry to attack enemy satellites, aircraft, and even targets on the ground. Officers
at the Space Command believe that before long the United States will fight its first war in
space. Should that day ever come, Colorado Springs will be at the center of the action.
The motto of a local air force unit promises a new kind of American firepower: “In Your
Face from Outer Space.”
The presence of these high-tech military installations attracted defense contractors to
Colorado Springs, mainly from California. Kaman Services arrived in 1957. Hewlett
Packard followed in 1962. TRW, a southern California firm, opened its first Colorado
Springs branch in 1968. Litton Data Systems moved one of its divisions from Van Nuys,
California, to Colorado Springs in 1976. Not long afterward Ford Aerospace sold ten
acres of land in Orange County and used the money to buy three hundred acres in
Colorado Springs. Today a long list of defense contractors does business in the city. The
advanced communications networks installed to serve those companies and the military
have drawn computer chip manufacturers, telemarketers, and software companies to
Colorado Springs. The quality of life is a big selling point, along with the well-educated
workforce and the local attitudes toward labor. A publication distributed by the
Colorado Springs Chamber of Commerce notes that in the city’s private industry, the
rate of union membership stands at 0.0 percent. Colorado Springs now views itself as a
place on the cutting edge, the high-tech capital of the Rockies. Business leaders
promote the town with nicknames like “Silicon Mountain,” “Space Mountain,” and “The
Space Capital of the Free World.”
The new businesses and residents from southern California brought a new set of attitudes.
In 1946, R. C. Hoiles, the owner of the Orange County Register and later the founder of
the Freedom Newspaper chain, purchased the largest daily newspaper in Colorado
Springs, the Gazette-Telegraph. Hoiles was politically conservative, a champion of
competition and free enterprise; his editorials had attacked Herbert Hoover for being too
left-wing. In the 1980s the Freedom Newspaper chain purchased the Gazette’s only rival
in town, the Colorado Springs Sun, a struggling paper with a more liberal outlook. After
buying the Sun, Freedom Newspapers fired all its employees and shut it down. In 1990,
James Dobson decided to move Focus on the Family, a religious organization, from the
Los Angeles suburb of Pomona to Colorado Springs. Dobson is a child psychologist and
radio personality as well as the author of a best-selling guide for parents, Dare to
Discipline (1970). He blames weak parents for the excesses of the sixties youth
counterculture, advocates spanking disobedient children with a “neutral object,” and
says that parents must convey to preschoolers two fundamental messages: “(1) I love
you, little one, more than you can possibly understand... (2) Because I love you so much, I
must teach you to obey me.” Although less well known than Jerry Falwell’s Moral Majority
and Pat Robertson’s Christian Coalition, Dobson’s Focus on the Family generates much
larger annual revenues.
The arrival of Focus on the Family helped turn Colorado Springs into a magnet for
evangelical Christian groups. The city had always been more conservative than Denver,
but that conservatism was usually expressed in the sort of live-and-let-live attitude
common in the American West. During the early 1990s, religious groups in Colorado
Springs became outspoken opponents of feminism, homosexuality, and Darwin’s theory
of evolution. The city became the headquarters for roughly sixty religious organizations,
20
some of them large, some of them painfully obscure. Members and supporters of the
International Bible Society, the Christian Booksellers Association, the World Radio
Missionary Fellowship, Young Life, the Fellowship of Christian Cowboys, and World
Christian Incorporated, among others, settled in Colorado Springs.
Today there is not a single elected official in Colorado Springs — or in El Paso County, the
surrounding jurisdiction — who’s a registered Democrat. Indeed, the Democratic Party
did not even run a candidate for Congress there in 2000. The political changes that have
lately swept through the city have also taken place, in a less extreme form, throughout
the Rocky Mountain West. A generation ago, the region was one of the most liberal in
the country. In 1972, all of the governors in the eight mountain states — Arizona,
Colorado, Montana, Nevada, New Mexico, Wyoming, even Idaho and Utah — were
Democrats. By 1998, all of the governors in these states were Republicans, as were threequarters of the U.S. senators. The region is now more staunchly Republican than the
American South.
As in Colorado Springs, the huge influx of white, middle-class voters from southern
California has played a decisive role in the Rocky Mountain West’s shift to the right.
During the early 1990s, for the first time in California history, more people moved out of
the state than into it. Between 1990 and 1995, approximately one million people left
southern California, many of them heading to the mountain states. William H. Frey, a
former professor of demography at the University of Michigan, has called this migration
“the new white flight.” In 1998, the white population of California fell below 50 percent
for the first time since the Gold Rush. The exodus of whites has changed California’s
political equation as well, turning the birthplace of the Reagan Revolution into one of the
nation’s most solidly Democratic states.
Many of the problems that caused white, middle-class families to leave southern
California are now appearing in the Rocky Mountain states. During the early 1990s, about
100,000 people moved to Colorado every year. But spending on government services
did not increase at a corresponding rate — because Colorado voters enacted a
Taxpayers Bill of Rights in 1992 that placed strict limits on new government a
corresponding rate — because Colorado voters enacted a Taxpayers Bill of Rights in
1992 that placed strict limits on new government spending. The initiative was modeled
after California’s Proposition 13 and championed by Douglas Bruce, a Colorado Springs
landlord who’d recently arrived from Los Angeles. By the late 1990s, Colorado’s spending
on education ranked forty-ninth in the nation; fire departments throughout the state
were understaffed; and parts of Interstate 25 in Colorado Springs were clogged with
three times the number of cars that the highway was designed to hold. Meanwhile, the
state government had an annual surplus of about $700 million that by law could not be
used to solve any of these problems. The development along Colorado’s Front Range is
not yet as all-encompassing as the sprawl of Los Angeles — where one-third of the
surface area is now covered by freeways, roads, and parking lots — but someday it may
be.
Colorado Springs now has the feel of a city whose identity is not yet fixed. Many longtime
residents strongly oppose the extremism of the newcomers, sporting bumper stickers that
say, “Don’t Californicate Colorado.” The city is now torn between opposing visions of
what America should be. Colorado Springs has twenty-eight Charismatic Christian
churches and almost twice as many pawnbrokers, a Lord’s Vineyard Bookstore and a
First Amendment Adult Bookstore, a Christian Medical and Dental Society and a Holey
Rollers Tattoo Parlor. It has a Christian summer camp whose founder, David Noebel,
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outlined the dangers of rock ’n’ roll in his pamphlet Communism, Hypnotism, and the
Beatles. It has a gay entertainment complex called The Hide & Seek, where the Gay
Rodeo Association meets. It has a public school principal who recently disciplined a
group of sixth-grade girls for reading a book on witchcraft and allegedly casting spells.
The loopiness once associated with Los Angeles has come full-blown to Colorado Springs
— the strange, creative energy that crops up where the future’s consciously being
made, where people walk the fine line separating a visionary from a total nutcase. At
the start of a new century, all sorts of things seem possible there. The cultural and the
physical landscapes of Colorado Springs are up for grabs.
Despite all the talk in Colorado about aerospace, biotech, computer software,
telecommunications, and other industries of the future, the largest private employer in
the state today is the restaurant industry. In Colorado Springs, the restaurant industry has
grown much faster than the population. Over the last three decades the number of
restaurants has increased fivefold. The number of chain restaurants has increased
tenfold. In 1967, Colorado Springs had a total of twenty chain restaurants. Now it has
twenty-one McDonald’s.
The fast food chains feed off the sprawl of Colorado Springs, accelerate it, and help set
its visual tone. They build large signs to attract motorists and look at cars the way
predators view herds of prey. The chains thrive on traffic, lots of it, and put new
restaurants at intersections where traffic is likely to increase, where development is
heading but real estate prices are still low. Fast food restaurants often serve as the shock
troops of sprawl, landing early and pointing the way. Some chains prefer to play follow
the leader: when a new McDonald’s opens, other fast food restaurants soon open
nearby on the assumption that it must be a good location.
Regardless of the billions spent on marketing and promotion, all the ads on radio and TV,
all the efforts to create brand loyalty, the major chains must live with the unsettling fact
that more than 70 percent of fast food visits are “impulsive.” The decision to stop for fast
food is made on the spur of the moment, without much thought. The vast majority of
customers do not set out to eat at a Burger King, a Wendy’s, or a McDonald’s. Often,
they’re not even planning to stop for food – until they see a sign, a familiar building, a set
of golden arches. Fast food, like the tabloids at a supermarket checkout, is an impulse
buy. In order to succeed, fast food restaurants must be seen.
The McDonald’s Corporation has perfected the art of restaurant site selection. In the
early days Ray Kroc flew in a Cessna to find schools, aiming to put new restaurants
nearby. McDonald’s later used helicopters to assess regional growth patterns, looking for
cheap land along highways and roads that would lie at the heart of future suburbs. In
the 1980s, the chain became one of the world’s leading purchasers of commercial
satellite photography, using it to predict sprawl from outer space. McDonald’s later
developed a computer software program called Quintillion that automated its siteselection process, combining satellite imagery with detailed maps, demographic
information, CAD drawings, and sales information from existing stores. “Geographic
information systems” like Quintillion are now routinely used as site- selection tools by fast
food chains and other retailers. As one marketing publication observed, the software
developed by Mc-Donald’s permits businessmen to “spy on their customers with the
same equipment once used to fight the cold war.”
The McDonald’s Corporation has used Colorado Springs as a test site for other types of
restaurant technology, for software and machines designed to cut labor costs and serve
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fast food even faster. Steve Bigari, who owns five local McDonald’s, showed me the new
contraptions at his place on Constitution Avenue. It was a rounded, postmodern
McDonald’s on the eastern edge of the city. The drive-through lanes had automatic
sensors buried in the asphalt to monitor the traffic. Robotic drink machines selected the
proper cups, filled them with ice, and then filled them with soda. Dispensers powered by
compressed carbon dioxide shot out uniform spurts of ketchup and mustard. An
elaborate unit emptied frozen french fries from a white plastic bin into wire-mesh baskets
for frying, lowered the baskets into hot oil, lifted them a few minutes later and gave them
a brief shake, put them back into the oil until the fries were perfectly cooked, and then
dumped the fries underneath heat lamps, crisp and ready to be served. Television
monitors in the kitchen instantly displayed the customer’s order. And advanced
computer software essentially ran the kitchen, assigning tasks to various workers for
maximum efficiency, predicting future orders on the basis of ongoing customer flow.
Bigari was cordial, good-natured, passionate about his work, proud of the new devices.
He told me the new software brought the “just in time” production philosophy of
Japanese automobile plants to the fast food business, a philosophy that McDonald’s has
renamed Made for You. As he demonstrated one contraption after another — including
a wireless hand-held menu that uses radio waves to transmit orders — a group of
construction workers across the street put the finishing touches on a new subdivision
called Constitution Hills. The streets had patriotic names, and the cattle ranch down the
road was for sale.
EVERY SATURDAY ELISA ZAMOT gets up at 5:15 in the morning. It’s a struggle, and her
head feels groggy as she steps into the shower. Her little sisters, Cookie and Sabrina, are
fast asleep in their beds. By 5:30, Elisa’s showered, done her hair, and put on her
McDonald’s uniform. She’s sixteen, bright-eyed and olive-skinned, pretty and petite,
ready for another day of work. Elisa’s mother usually drives her the half-mile or so to the
restaurant, but sometimes Elisa walks, leaving home before the sun rises. Her family’s
modest townhouse sits beside a busy highway on the south side of Colorado Springs, in a
largely poor and working-class neighborhood. Throughout the day, sounds of traffic fill
the house, the steady whoosh of passing cars. But when Elisa heads for work, the streets
are quiet, the sky’s still dark, and the lights are out in the small houses and rental
apartments along the road.
When Elisa arrives at McDonald’s, the manager unlocks the door and lets her in.
Sometimes the husband-and-wife cleaning crew are just finishing up. More often, it’s just
Elisa and the manager in the restaurant, surrounded by an empty parking lot. For the
next hour or so, the two of them get everything ready. They turn on the ovens and grills.
They go downstairs into the basement and get food and supplies for the morning shift.
They get the paper cups, wrappers, cardboard containers, and packets of condiments.
They step into the big freezer and get the frozen bacon, the frozen pancakes, and the
frozen cinnamon rolls. They get the frozen hash browns, the frozen biscuits, the frozen
McMuffins. They get the cartons of scrambled egg mix and orange juice mix. They bring
the food upstairs and start preparing it before any customers appear, thawing some
things in the microwave and cooking other things on the grill. They put the cooked food
in special cabinets to keep it warm.
The restaurant opens for business at seven o’clock, and for the next hour or so, Elisa and
the manager hold down the fort, handling all the orders. As the place starts to get busy,
other employees arrive. Elisa works behind the counter. She takes orders and hands food
to customers from breakfast through lunch. When she finally walks home, after seven
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hours of standing at a cash register, her feet hurt. She’s wiped out. She comes through
the front door, flops onto the living room couch, and turns on the TV. And the next
morning she gets up at 5:15 again and starts the same routine.
Up and down Academy Boulevard, along South Nevada, Circle Drive, and Woodman
Road, teenagers like Elisa run the fast food restaurants of Colorado Springs. Fast food
kitchens often seem like a scene from Bugsy Malone, a film in which all the actors are
children pretending to be adults. No other industry in the United States has a workforce
so dominated by adolescents. About two-thirds of the nation’s fast food workers are
under the age of twenty. Teenagers open the fast food outlets in the morning, close
them at night, and keep them going at all hours in between. Even the managers and
assistant managers are sometimes in their late teens. Unlike Olympic gymnastics — an
activity in which teenagers consistently perform at a higher level than adults — there’s
nothing about the work in a fast food kitchen that requires young employees. Instead of
relying upon a small, stable, well-paid, and well-trained workforce, the fast food industry
seeks out part-time, unskilled workers who are willing to accept low pay. Teenagers have
been the perfect candidates for these jobs, not only because they are less expensive to
hire than adults, but also because their youthful inexperience makes them easier to
control.
The labor practices of the fast food industry have their origins in the assembly line systems
adopted by American manufacturers in the early twentieth century. Business historian
Alfred D. Chandler has argued that a high rate of “throughput” was the most important
aspect of these mass production systems. A factory’s throughput is the speed and
volume of its flow — a much more crucial measurement, according to Chandler, than
the number of workers it employs or the value of its machinery. With innovative
technology and the proper organization, a small number of workers can produce an
enormous amount of goods cheaply. Throughput is all about increasing the speed of
assembly, about doing things faster in order to make more.
Although the McDonald brothers had never encountered the term “throughput” or
studied “scientific management,” they instinctively grasped the underlying principles and
applied them in the Speedee Service System. The restaurant operating scheme they
developed has been widely adopted and refined over the past half century. The ethos
of the assembly line remains at its core. The fast food industry’s obsession with throughput
has altered the way millions of Americans work, turned commercial kitchens into small
factories, and changed familiar foods into commodities that are manufactured.
At Burger King restaurants, frozen hamburger patties are placed on a conveyer belt and
emerge from a broiler ninety seconds later fully cooked. The ovens at Pizza Hut and at
Domino’s also use conveyer belts to ensure standardized cooking times. The ovens at
McDonald’s look like commercial laundry presses, with big steel hoods that swing down
and grill hamburgers on both sides at once. The burgers, chicken, french fries, and buns
are all frozen when they arrive at a Mc-Donald’s. The shakes and sodas begin as syrup.
At Taco Bell restaurants the food is “assembled,” not prepared. The guacamole isn’t
made by workers in the kitchen; it’s made at a factory in Michoacán, Mexico, then
frozen and shipped north. The chain’s taco meat arrives frozen and precooked in
vacuum-sealed plastic bags. The beans are dehydrated and look like brownish corn
flakes. The cooking process is fairly simple. “Everything’s add water,” a Taco Bell
employee told me. “Just add hot water.”
Although Richard and Mac McDonald introduced the division of labor to the restaurant
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business, it was a McDonald’s executive named Fred Turner who created a production
system of unusual thoroughness and attention to detail. In 1958, Turner put together an
operations and training manual for the company that was seventy-five pages long,
specifying how almost everything should be done. Hamburgers were always to be
placed on the grill in six neat rows; french fries had to be exactly 0.28 inches thick. The
McDonald’s operations manual today has ten times the number of pages and weighs
about four pounds. Known within the company as “the Bible,” it contains precise
instructions on how various appliances should be used, how each item on the menu
should look, and how employees should greet customers. Operators who disobey these
rules can lose their franchises. Cooking instructions are not only printed in the manual,
they are often designed into the machines. A McDonald’s kitchen is full of buzzers and
flashing lights that tell employees what to do.
At the front counter, computerized cash registers issue their own commands. Once an
order has been placed, buttons light up and suggest other menu items that can be
added. Workers at the counter are told to increase the size of an order by
recommending special promotions, pushing dessert, pointing out the financial logic
behind the purchase of a larger drink. While doing so, they are instructed to be upbeat
and friendly. “Smile with a greeting and make a positive first impression,” a Burger King
training manual suggests. “Show them you are GLAD TO SEE THEM. Include eye contact
with the cheerful greeting.”
The strict regimentation at fast food restaurants creates standardized products. It
increases the throughput. And it gives fast food companies an enormous amount of
power over their employees. “When management determines exactly how every task is
to be done... and can impose its own rules about pace, output, quality, and technique,”
the sociologist Robin Leidner has noted, “[it] makes workers increasingly
interchangeable.” The management no longer depends upon the talents or skills of its
workers — those things are built into the operating system and machines. Jobs that have
been “de-skilled” can be filled cheaply. The need to retain any individual worker is
greatly reduced by the ease with which he or she can be replaced.
Teenagers have long provided the fast food industry with the bulk of its workforce. The
industry’S rapid growth coincided with the baby- boom expansion of that age group.
Teenagers were in many ways the ideal candidates for these low-paying jobs. Since most
teenagers still lived at home, they could afford to work for wages too low to support an
adult, and until recently, their limited skills attracted few other employers. A job at a fast
food restaurant became an American rite of passage, a first job soon left behind for
better things. The flexible terms of employment in the fast food industry also attracted
housewives who needed extra income. As the number of baby-boom teenagers
declined, the fast food chains began to hire other marginalized workers: recent
immigrants, the elderly, and the handicapped.
English is now the second language of at least one-sixth of the nation’s restaurant
workers, and about one-third of that group speaks no English at all. The proportion of fast
food workers who cannot speak English is even higher. Many know only the names of the
items on the menu; they speak “McDonald’s English.”
The fast food industry now employs some of the most disadvantaged members of
American society. It often teaches basic job skills — such as getting to work on time — to
people who can barely read, whose lives have been chaotic or shut off from the
mainstream. Many as getting to work on time — to people who can barely read, whose
25
lives have been chaotic or shut off from the mainstream. Many individual franchisees are
genuinely concerned about the well-being of their workers. But the stance of the fast
food industry on issues involving employee training, the minimum wage, labor unions,
and overtime pay strongly suggests that its motives in hiring the young, the poor, and the
handicapped are hardly altruistic.
The three corporations now employ about 3.7 million people worldwide, operate about
60,000 restaurants, and open a new fast food restaurant every two hours. Putting aside
their intense rivalry for customers, the executives had realized at a gathering the previous
evening that when it came to labor issues, they were in complete agreement. “We’ve
come to the conclusion that we’re in support of each other,” Dave Brewer, the vice
president of engineering at KFC, explained. “We are aligned as a team to support this
industry.” One of the most important goals they held in common was the redesign of
kitchen equipment so that less money needed to be spent training workers. “Make the
equipment intuitive, make it so that the job is easier to do right than to do wrong,”
advised Jerry Sus, the leading equipment systems engineer at McDonald’s. “The easier it
is for him [the worker] to use, the easier it is for us not to have to train him.” John Reckert
— director of strategic operations and of research and development at Burger King —
felt optimistic about the benefits that new technology would bring the industry. “We can
develop equipment that only works one way,” Reckert said. “There are many different
ways today that employees can abuse our product, mess up the flow... If the equipment
only allows one process, there’s very little to train.” Instead of giving written instructions to
crew members, another panelist suggested, rely as much as possible on photographs of
menu items, and “if there are instructions, make them very simple, write them at a fifthgrade level, and write them in Spanish and English.” All of the executives agreed that
“zero training” was the fast food industry’s ideal, though it might not ever be attained.
While quietly spending enormous sums on research and technology to eliminate
employee training, the fast food chains have accepted hundreds of millions of dollars in
government subsidies for “training” their workers. Through federal programs such as the
Targeted Jobs Tax Credit and its successor, the Work Opportunity Tax Credit, the chains
have for years claimed tax credits of up to $2,400 for each new low- income worker they
hired. In 1996 an investigation by the U.S. Department of Labor concluded that 92
percent of these workers would have been hired by the companies anyway — and that
their new jobs were part-time, provided little training, and came with no benefits. These
federal subsidy programs were created to reward American companies that gave job
training to the poor.
Attempts to end these federal subsidies have been strenuously opposed by the National
Council of Chain Restaurants and its allies in Congress. The Work Opportunity Tax Credit
program was renewed in 1996. It offered as much as $385 million in subsidies the
following year. Fast food restaurants had to employ a worker for only four hundred hours
to receive the federal money — and then could get more money as soon as that worker
quit and was replaced. American taxpayers have in effect subsidized the industry’s high
turnover rate, providing company tax breaks for workers who are employed for just a few
months and receive no training. The industry front group formed to defend these
government subsidies is called the “Committee for Employment Opportunities.” Its chief
lobbyist, Bill Signer, told the Houston Chronicle there was nothing wrong with the use of
federal subsidies to create low-paying, low-skilled, short-term jobs for the poor. Trying to
justify the minimal amount of training given to these workers, Signer said, “They’ve got to
crawl before they can walk.”
The employees whom the fast food industry expects to crawl are by far the biggest
26
group of low-wage workers in the United States today. The nation has about 1 million
migrant farm workers and about 3.5 million fast food workers. Although picking
strawberries is orders of magnitude more difficult than cooking hamburgers, both jobs are
now filled by people who are generally young, unskilled, and willing to work long hours
for low pay. Moreover, the turnover rates for both jobs are among the highest in the
American economy. The annual turnover rate in the fast food industry is now about 300
to 400 per-cent. The typical fast food worker quits or is fired every three to four months.
The fast food industry pays the minimum wage to a higher proportion of its workers than
any other American industry. Consequently, a low minimum wage has long been a
crucial part of the fast food industry’s business plan. Between 1968 and 1990, the years
when the fast food chains expanded at their fastest rate, the real value of the U.S.
minimum wage fell by almost 40 percent. In the late 1990s, the real value of the U.S.
minimum wage still remained about 27 percent lower than it was in the late 1960s.
Nevertheless, the National Restaurant Association (NRA) has vehemently opposed any
rise in the minimum wage at the federal, state, or local level. About sixty large foodservice companies — including Jack in the Box, Wendy’s, Chevy’s, and Red Lobster —
have backed congressional legislation that would essentially eliminate the federal
minimum wage by allowing states to disregard it. Pete Meersman, the president of the
Colorado Restaurant Association, advocates creating a federal guest worker program to
import low-wage foodservice workers from overseas.
While the real value of the wages paid to restaurant workers has declined for the past
three decades, the earnings of restaurant company executives have risen considerably.
According to a 1997 survey in Nation’s Restaurant News, the average corporate
executive bonus was $131,000, an increase of 20 percent over the previous year.
Increasing the federal minimum wage by a dollar would add about two cents to the cost
of a fast food hamburger.
In 1938, at the height of the Great Depression, Congress passed legislation to prevent
employers from exploiting the nation’s most vulnerable workers. The Fair Labor Standards
Act established the first federal minimum wage. It also imposed limitations on child labor.
And it mandated that employees who work more than forty hours a week be paid
overtime wages for each additional hour. The overtime wage was set at a minimum of
one and a half times the regular wage.
Today few employees in the fast food industry qualify for overtime — and even fewer are
paid it. Roughly 90 percent of the nation’s fast food workers are paid an hourly wage,
provided no benefits, and scheduled to work only as needed. Crew members are
employed “at will.” If the restaurant’s busy, they’re kept longer than usual. If business is
slow, they’re sent home early. Managers try to make sure that each worker is employed
less than forty hours a week, thereby avoiding any overtime payments. A typical
McDonald’s or Burger King restaurant has about fifty crew members. They work an
average of thirty hours a week. By hiring a large number of crew members for each
restaurant, sending them home as soon as possible, and employing them for fewer than
forty hours a week whenever possible, the chains keep their labor costs to a bare
minimum.
A handful of fast food workers are paid regular salaries. A fast food restaurant that
employs fifty crew members has four or five managers and assistant managers. They earn
about $23,000 a year and usually receive medical benefits, as well as some form of
bonus or profit sharing. They have an opportunity to rise up the corporate ladder. But
27
they also work long hours without overtime— fifty, sixty, seventy hours a week. The
turnover rate among assistant managers is extremely high. The job offers little opportunity
for independent decision- making. Computer programs, training manuals, and the
machines in the kitchen determine how just about everything must be done.
Fast food managers do have the power to hire, fire, and schedule workers. Much of their
time is spent motivating their crew members. In the absence of good wages and secure
employment, the chains try to inculcate “team spirit” in their young crews. Workers who
fail to work hard, who arrive late, or who are reluctant to stay extra hours are made to
feel that they’re making life harder for everyone else, letting their friends and coworkers
down. For years the McDonald’s Corporation has provided its managers with training in
“transactional analysis,” a set of psychological techniques popularized in the book I’m
OK — You’re OK (1969). One of these techniques is called “stroking” — a form of positive
reinforcement, deliberate praise, and recognition that many teenagers don’t get at
home. Stroking can make a worker feel that his or her contribution is sincerely valued.
And it’s much less expensive than raising wages or paying overtime.
The fast food chains often reward managers who keep their labor costs low, a practice
that often leads to abuses. In 1997 a jury in Washington State found that Taco Bell had
systematically coerced its crew members into working off the clock in order to avoid
paying them overtime. The bonuses of Taco Bell restaurant managers were tied to their
success at cutting labor costs. The managers had devised a number of creative ways to
do so. Workers were forced to wait until things got busy at a restaurant before officially
starting their shifts. They were forced to work without pay after their shifts ended. They
were forced to clean restaurants on their own time. And they were sometimes
compensated with food, not wages. Many of the workers involved were minors and
recent immigrants. Before the penalty phase of the Washington lawsuit, the two sides
reached a settlement; Taco Bell agreed to pay millions of dollars in back wages, but
admitted no wrongdoing. As many as 16,000 current and former employees were owed
money by the company. One employee, a high school dropout named Regina Jones,
regularly worked seventy to eighty hours a week but was paid for only forty. Lawsuits
involving similar charges against Taco Bell are now pending in Oregon and California.
AFTER WORKING AT Burger King restaurants for about a year, the sociologist Ester Reiter
concluded that the trait most valued in fast food workers is “obedience.” In other mass
production industries ruled by the assembly line, labor unions have gained workers higher
wages, formal grievance procedures, and a voice in how the work is performed. The
high turnover rates at fast food restaurants, the part-time nature of the jobs, and the
marginal social status of the crew members have made it difficult to organize their
workers. And the fast food chains have fought against unions with the same zeal they’ve
displayed fighting hikes in the minimum wage.
The McDonald’s Corporation insists that its franchise operators follow directives on food
preparation, purchasing, store design, and countless other minute details. Company
specifications cover everything from the size of the pickle slices to the circumference of
the paper cups. When it comes to wage rates, however, the company is remarkably
silent and laissez-faire. This policy allows operators to set their wages according to local
labor markets — and it absolves the McDonald’s Corporation of any formal responsibility
for roughly three-quarters of the company’s workforce. McDonald’s decentralized hiring
practices have helped thwart efforts to organize the company’s workers. But whenever a
union gains support at a particular restaurant, the McDonald’s Corporation suddenly
shows tremendous interest in the emotional and financial well-being of the workers there.
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During the late 1960s and early 1970s, McDonald’s workers across the country attempted
to join unions. In response the company developed sophisticated methods for keeping
unions out of its restaurants. A “flying squad” of experienced managers and corporate
executives was sent to a restaurant the moment union activity was suspected. Seemingly
informal “rap sessions” were held with disgruntled employees. The workers were
encouraged to share their feelings. They were flattered and stroked. And more
importantly, they were encouraged to share information about the union’s plans and the
names of union sympathizers. If the rap sessions failed to provide adequate information,
the stroking was abandoned for a more direct approach.
In 1973, amid a bitter organizing drive in San Francisco, a group of young McDonald’s
employees claimed that managers had forced them to take lie detector tests,
interrogated them about union activities, and threatened them with dismissal if they
refused to answer. Spokesmen for McDonald’s admitted that polygraph tests had been
administered, but denied that any coercion was involved. Bryan Seale, San Francisco’s
labor commissioner, closely studied some of McDonald’s old job applications and found
a revealing paragraph in small print near the bottom. It said that employees who
wouldn’t submit to lie detector tests could face dismissal. The labor commissioner
ordered McDonald’s to halt the practice, which was a violation of state law. He also
ordered the company to stop accepting tips at its restaurants, since customers were
being misled: the tips being left for crew members were actually being kept by the
company.
The San Francisco union drive failed, as did every other McDonald’s union drive — with
one exception. Workers at a McDonald’s in Mason City, Iowa, voted to join the United
Food and Commercial Workers union in 1971. The union lasted just four years. The
McDonald’s Corporation no longer asks crew members to take lie detector tests and
advises its franchisees to obey local labor laws. Nevertheless, top McDonald’s executives
still travel from Oak Brook, Illinois, to the site of a suspected union drive, even when the
restaurant is overseas. Rap sessions and high-priced attorneys have proved to be
effective tools for ending labor disputes. The company’s guidance has helped
McDonald’s franchisees defeat literally hundreds of efforts to unionize.
Despite more than three decades of failure, every now and then another group of
teenagers tries to unionize a McDonald’s. In February of 1997 workers at a McDonald’s
restaurant in St. Hubert, a suburb of Montreal, applied to join the Teamsters union. More
than three-quarters of the crew members signed union cards, hoping to create the only
unionized McDonald’s in North America. Tom and Mike Cappelli, the operators of the
restaurant, employed fifteen attorneys— roughly one lawyer for every four crew
members — and filed a series of legal motions to stall the union certification process.
Union leaders argued that any delay would serve McDonald’s interests, because
turnover in the restaurant’s workforce would allow the Cappellis to hire anti-union
employees. After a year of litigation, a majority of the McDonald’s workers still supported
the Teamsters. The Quebec labor commissioner scheduled a final certification hearing for
the union on March 10, 1998.
Tom and Mike Cappelli closed the St. Hubert McDonald’s on February 12, just weeks
before the union was certified. Workers were given notice on a Thursday; the
McDonald’s shut down for good the following day, Friday the thirteenth. Local union
officials were outraged. Clement Godbout, head of the Quebec Federation of Labour,
accused the McDonald’s Corporation of shutting down the restaurant in order to send
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an unmistakable warning to its other workers in Canada. Godbout called McDonald’s
“one of the most anti-union companies on the planet.” The McDonald’s Corporation
denied that it had anything to do with the decision. Tom and Mike Cappelli claimed that
the St. Hubert restaurant was a money-loser, though it had operated continuously at the
same location for seventeen years. McDonald’s has roughly a thousand restaurants in
Canada. The odds against a McDonald’s restaurant in Canada going out of business —
based on the chain’s failure rate since the early 1990s — is about 300 to 1. “Did
somebody say McUnion?” a Canadian editorial later asked. “Not if they want to keep
their McJob.”
This was not the first time that a McDonald’s restaurant suddenly closed in the middle of
a union drive. During the early 1970s, workers were successfully organizing a McDonald’s
in Lansing, Michigan. All the crew members were fired, the restaurant was shut down, a
new McDonald’s was built down the block — and the workers who’d signed union cards
were not rehired. Such tactics have proven remarkably successful. As of this writing, none
of the workers at the roughly fifteen thousand McDonald’s in North America is
represented by a union.
ALMOST EVERY FAST FOOD restaurant in Colorado Springs has a banner or sign that says
“Now Hiring.” The fast food chains have become victims of their own success, as one
business after another tries to poach their teenage workers. Teenagers now sit behind the
front desk at hotels, make calls for telemarketers, sell running shoes at the mall. The low
unemployment rate in Colorado Springs has made the task of finding inexpensive
workers even more difficult. Meanwhile, the competition among fast food restaurants has
increased. Chains that have competed in the city for years keep opening new outlets,
while others are entering the market for the first time. Carl’s Jr. has come to Colorado
Springs, opening stand-alone restaurants and “co-branded” outlets inside Texaco gas
stations. When a fast food restaurant goes out of business, a new one often opens at the
same location, like an army that’s seized the outpost of a conquered foe. Instead of a
new flag being raised, a big new plastic sign goes up.
Local fast food franchisees have little ability to reduce their fixed costs: their lease
payments, franchise fees, and purchases from company- approved suppliers.
Franchisees do, however, have some control over wage rates and try to keep them as
low as possible. The labor structure of the fast food industry demands a steady supply of
young and unskilled workers. But the immediate needs of the chains and the long-term
needs of teenagers are fundamentally at odds.
At Cheyenne Mountain High School, set in the foothills, with a grand view of the city, few
of the students work at fast food restaurants. Most of them are white and upper-middle
class. During the summers, the boys often work as golf caddies or swimming pool
lifeguards. The girls often work as babysitters at the Broadmoor. When Cheyenne
Mountain kids work during the school year, they tend to find jobs at the mall, the girls
employed at clothing stores like the Gap or the Limited, the boys at sporting goods stores
like the Athlete’s Foot. These jobs provide discounts on merchandise and a chance to
visit with school friends who are out shopping. The pay of a job is often less important
than its social status. Working as a hostess at an upscale chain restaurant like Carriba’s,
T.G.I. Friday’s, or the Outback Steakhouse is considered a desirable job, even if it pays
minimum wage. Working at a fast food restaurant is considered bottom of the heap.
Jane Trogdon is head of the guidance department at Harrison High School in Colorado
Springs. Harrison has the reputation of being a “rough” school, a “gang” school. The rap
30
is not entirely deserved; it may have stuck because Harrison is where many of the city’s
poorest teenagers go to school. Harrison is where you will find an abundance of fast food
workers. About 60 percent of the students come from low- income families. In a town
with a relatively low minority population, only 40 percent of the students at Harrison are
white. The school occupies a clean, modern building on the south side of town, right next
to 1–25. From some of the classroom windows, you can see the cars zooming past. On
the other side of the interstate, a new multiplex theater with twenty-four screens beckons
students to cut class.
Teachers often don’t want to teach at Harrison, and some don’t last there for long. Jane
Trogdon has worked at the school since the day it opened in 1967. Over the past three
decades, Trogdon has observed tremendous changes in the student body. Harrison was
always the school on the wrong side of the tracks, but the kids today seem poorer than
ever. It used to be, even in many low-income families, that the father worked and the
mother stayed home to raise the children. Now it seems that no one’s home and that
both parents work just to make ends meet, often holding down two or three jobs. Many
of the kids at Harrison are on their own from an early age. Parents increasingly turn to the
school for help, asking teachers to supply discipline and direction. The teachers do their
best, despite a lot of disrespect from students and the occasional threat of violence.
Trogdon worries about the number of kids at Harrison who leave school in the afternoon
and go straight to work, mainly at fast food restaurants. She also worries about the
number of hours they’re working.
Although some students at Harrison work at fast food restaurants to help their families,
most of the kids take jobs after school in order to have a car. In the suburban sprawl of
Colorado Springs, having your own car seems like a necessity. Car payments and
insurance easily come to $300 a month. As more and more kids work to get their own
wheels, fewer participate in after-school sports and activities. They stay at their jobs late
into the night, neglect their homework, and come to school exhausted. In Colorado, kids
can drop out of school at the age of sixteen. Dropping out often seems tempting to
sophomores who are working in the “real world,” earning money, being eagerly
recruited by local fast food chains, retail chains, and telemarketers. Thirty years ago,
businesses didn’t pursue teenage workers so aggressively. Harrison usually has about four
hundred students in its freshman class. About half of them eventually graduate; perhaps
fifty go to college.
When Trogdon first came to work at Harrison, the Vietnam war was at its peak, and angry
battles raged between long-haired students and kids whose fathers were in the military.
Today she senses a profound apathy at the school. The turmoil of an earlier era has been
replaced by a sad and rootless anomie. “I have lots and lots of kids who are terribly
depressed,” Trogdon says. “I’ve never seen so many, so young, feel this way.”
Trogdon’s insights about teenagers and after-school jobs are supported by Protecting
Youth at Work, a report on child labor published by the National Academy of Sciences in
1998. It concluded that the long hours many American teenagers now spend on the job
pose a great risk to their future educational and financial success. Numerous studies
have found that kids who work up to twenty hours a week during the school year
generally benefit from the experience, gaining an increased sense of personal
responsibility and self-esteem. But kids who work more than that are far more likely to cut
classes and drop out of high school. Teenage boys who work longer hours are much
more likely to develop substance abuse problems and commit petty crimes. The
negative effects of working too many hours are easy to explain: when kids go to work,
31
they are neither at home nor at school. If the job is boring, overly regimented, or
meaningless, it can create a lifelong aversion to work. All of these trends are most
pronounced among poor and disadvantaged teenagers. While stressing the great
benefits of work in moderation, the National Academy of Sciences report warned that
short-term considerations are now limiting what millions of American kids can ever hope
to achieve.
Elisa Zamot is a junior at Harrison High. In addition to working at McDonald’s on the
weekends, she also works there two days a week after school. All together, she spends
about thirty to thirty-five hours a week at the restaurant. She earns the minimum wage.
Her parents, Carlos and Cynthia, are loving but strict. They’re Puerto Rican and moved to
Colorado Springs from Lakewood, New Jersey.. They make sure Elisa does all her
homework and impose a midnight curfew. Elisa’s usually too tired to stay out late,
anyway. Her school bus arrives at six in the morning, and classes start at seven.
Elisa had wanted to work at McDonald’s ever since she was a toddler —a feeling shared
by many of the McDonald’s workers I met in Colorado Springs. But now she hates the job
and is desperate to quit. Working at the counter, she constantly has to deal with rude
remarks and complaints. Many of the customers look down on fast food workers and feel
entitled to treat them with disrespect. Sweet-faced Elisa is often yelled at by strangers
angry that their food’s taking too long or that something is wrong with their order. One
elderly woman threw a hamburger at her because there was mustard on it. Elisa hopes
to find her next job at a Wal-Mart, at a clothing store, anywhere but a fast food
restaurant. A good friend of hers works at FutureCall, the largest telemarketer in
Colorado Springs and a big recruiter of teenaged labor. Her friend works there about
forty hours a week, on top of attending Harrison High. The pay is terrific, but the job
sounds miserable. The sort of workplace regimentation that the fast food chains
pioneered has been taken to new extremes by America’s telemarketers.
“IT’S TIME FOR BRINGING IN THE GREEN!” a FutureCall recruiting ad says: “Lots O’ Green!”
The advertisement promises wages of $10 to $15 an hour for employees who work more
than forty hours a week. Elisa’s friend is sixteen. After school, she stays at the FutureCall
building onNorth Academy Boulevard until ten o’clock at night, staring at a computer
screen. The computer automatically dials people throughout the United States. When
somebody picks up the phone, his or her name flashes on the screen, along with the
sales pitch that FutureCall’s “teleservice representative” (TSR) is supposed to make on
behalf of well-known credit card companies, phone companies, and retailers. TSRs are
instructed never to let someone refuse a sales pitch without being challenged. The
computer screen offers a variety of potential “rebuttals.” TSRs make about fifteen
“presentations” an hour, going for a sale, throwing out one rebuttal after another to
avoid being shot down. About nine out of ten people decline the offer, but the one
person who says yes makes the whole enterprise quite profitable. Supervisors walk up and
down the rows, past hundreds of identical cubicles, giving pep talks, eavesdropping on
phone calls, suggesting rebuttals, and making sure none of the teenage workers is doing
homework on the job. The workplace at FutureCall is even more rigorously controlled
than the one at McDonald’s.
After graduating from Harrison, Elisa hopes to go to Princeton. She’s saving most of her
earnings to buy a car. The rest is spent on clothes, shoes, and school lunches. A lot of kids
at Harrison don’t save any of the money earned at their fast food jobs. They buy
beepers, cellular phones, stereos, and designer clothes. Kids are wearing Tommy Hilfiger
and FUBU at Harrison right now; Calvin Klein is out. Hip-hop culture reigns, the West Coast
32
brand, filtered through Compton and L.A.
During my interviews with local high school kids, I heard numerous stories of fifteen-yearolds working twelve-hour shifts at fast food restaurants and sophomores working long
past midnight. The Fair Labor Standards Act prohibits the employment of kids under the
age of sixteen for more than three hours on a school day, or later than seven o’clock at
night. Colorado state law prohibits the employment of kids under the age of eighteen for
more than eight hours a day and also prohibits their employment at jobs involving
hazardous machinery. According to the workers I met, violations of these state and
federal labor laws are now fairly commonplace in the fast food restaurants of Colorado
Springs. George, a former Taco Bell employee, told me that he sometimes helped close
the restaurant, staying there until two or three in the morning. He was sixteen at the time.
Robbie, a sixteen-year-old Burger King employee, said he routinely worked ten-hour shifts.
And Tommy, a seventeen-year-old who works at McDonald’s, bragged about his skill
with the electric tomato dicer, a machine that should have been off-limits. “I’m like an
expert at using the damn thing,” he said, “’cause I’m the only one that knows how to
work it.” He also uses the deep fryer, another labor code violation. None of these
teenagers had been forced to break the law; on the contrary, they seemed eager to do
it.
Most of the high school students I met liked working at fast food restaurants. They
complained that the work was boring and monotonous, but enjoyed earning money,
getting away from school and parents, hanging out with friends at work, and goofing off
as much as possible. Few of the kids liked working the counter or dealing with customers.
They much preferred working in the kitchen, where they could talk to friends and fool
around. Food fights were popular. At one Taco Bell, new employees, departing
employees, and employees who were merely disliked became targets for the sour
cream and guacamole guns. “This kid, Leo, he smelled like guacamole for a month,”
one of the attackers later bragged.
The personality of a fast food restaurant’s manager largely determined whether working
there would be an enjoyable experience or an unpleasant one. Good managers
created a sense of pride in the work and an upbeat atmosphere. They allowed
scheduling changes and encouraged kids to do their schoolwork. Others behaved
arbitrarily, picked on workers, yelled at workers, and made unreasonable demands. They
were personally responsible for high rates of turnover. An assistant manager at a
McDonald’s in Colorado Springs always brought her five-year-old daughter to the
restaurant and expected crew members to baby-sit for her. The assistant manager was a
single mother. One crew member whom I met loved to look after the little girl; another
resented it; and both found it hard to watch the child playing for hours amid the busy
kitchen, the counter staff, the customers at their tables, and the life-size statue of Ronald
McDonald.
None of the fast food workers I met in Colorado Springs spoke of organizing a union. The
thought has probably never occurred to them. When these kids don’t like the working
conditions or the manager, they quit. Then they find a job at another restaurant, and the
cycle goes on and on.
THE INJURY RATE OF teenage workers in the United States is about twice as high as that of
adult workers. Teenagers are far more likely to be untrained, and every year, about
200,000 are injured on the job. The most common workplace injuries at fast food
restaurants are slips, falls, strains, and burns. The fast food industry’s expansion, however,
33
coincided with a rising incidence of workplace violence in the United States. Roughly
four or five fast food workers are now murdered on the job every month, usually during
the course of a robbery. Although most fast food robberies end without bloodshed, the
level of violent crime in the industry is surprisingly high. In 1998, more restaurant workers
were murdered on the job in the United States than police officers.
America’s fast food restaurants are now more attractive to armed robbers than
convenience stores, gas stations, or banks. Other retail businesses increasingly rely upon
credit card transactions, but fast food restaurants still do almost all of their business in
cash. While convenience store chains have worked hard to reduce the amount of
money in the till (at 7-Eleven stores the average robbery results in a loss of about thirtyseven dollars), fast food restaurants often have thousands of dollars on the premises. Gas
stations and banks now routinely shield employees behind bullet-resistant barriers, a
security measure that would be impractical at most fast food restaurants. And the same
features that make these restaurants so convenient — their location near intersections
and highway off-ramps, even their drive-through features that make these restaurants so
convenient — their location near intersections and highway off-ramps, even their drivethrough windows — facilitate a speedy getaway.
A fast food robbery is most likely to occur when only a few crew members are present:
early in the morning before customers arrive or late at night near closing time. A couple
of sixteen-year-old crew members and a twenty-year-old assistant manager are often
the only people locking up a restaurant, long after midnight. When a robbery takes
place, the crew members are frequently herded into the basement freezer. The robbers
empty the cash registers and the safe, then hit the road.
The same demographic groups widely employed at fast food restaurants — the young
and the poor — are also responsible for much of the nation’s violent crime. According to
industry studies, about two-thirds of the robberies at fast food restaurants involve current
or former employees. The combination of low pay, high turnover, and ample cash in the
restaurant often leads to crime. A 1999 survey by the National Food Service Security
Council, a group funded by the large chains, found that about half of all restaurant
workers engaged in some form of cash or property theft — not including the theft of
food. The typical employee stole about $218 a year; new employees stole almost $100
more. Studies conducted by Jerald Greenberg, a professor of management at the
University of Ohio and an expert on workplace crime, have found that when people are
treated with dignity and respect, they’re less likely to steal from their employer. “It may
be common sense,” Greenberg says, “but it’s obviously not common practice.” The
same anger that causes most petty theft, the same desire to strike back at an employer
perceived as unfair, can escalate to armed robbery. Restaurant managers are usually,
but not always, the victims of fast food crimes. Not long ago, the day manager of a McDonald’s in Moorpark, California, recognized the masked gunman emptying the safe. It
was the night manager.
The Occupational Safety and Health Administration (OSHA) attempted in the mid-1990s
to issue guidelines for preventing violence at restaurants and stores that do business at
night. OSHA was prompted, among other things, by the fact that homicide had become
the leading cause of workplace fatalities among women. The proposed guidelines were
entirely voluntary and seemed innocuous. OSHA recommended, for example, that latenight retailers improve visibility within their stores and make sure their parking lots were
well lit. The National Restaurant Association, along with other industry groups, responded
by enlisting more than one hundred congressmen to oppose any OSHA guidelines on
34
retail violence. An investigation by the Los Angeles Times found that many of the
congressmen had recently accepted donations from the NRA and the National
Association of Convenience Stores. “Who would oppose putting out guidelines on saving
women’s lives in the workplace?” Joseph Dear, a former head of OSHA, said to a Times
reporter. “The companies that employ those women.”
The restaurant industry has continued to fight not only guidelines on workplace violence,
but any enforcement of OSHA regulations. At a 1997 restaurant industry “summit” on
violence, executives representing the major chains argued that OSHA guidelines could
be used by plaintiffs in lawsuits stemming from a crime, that guidelines were completely
unnecessary, and that there was no need to supply the government with “potentially
damaging” robbery statistics. The group concluded that OSHA should become just an
information clearinghouse without the authority to impose fines or compel security
measures. For years, one of OSHA’s most severe critics in Congress has been Jay Dickey,
an Arkansas Republican who once owned two Taco Bells. In January of 1999 the
National Council of Chain Restaurants helped to form a new organization to lobby
against OSHA regulations. The name of the industry group is the “Alliance for Workplace
Safety.”
The leading fast food chains have tried to reduce violent crime by spending millions on
new security measures — video cameras, panic buttons, drop-safes, burglar alarms,
additional lighting. But even the most heavily guarded fast food restaurants remain
vulnerable. In April of 2000 a Burger King on the grounds of Offut Air Force Base in
Nebraska was robbed by two men in ski masks carrying shotguns. They were wearing
purple Burger King shirts and got away with more than $7,000. Joseph A. Kinney, the
president of the National Safe Workplace Institute, argues that the fast food industry
needs to make fundamental changes in its labor relations. Raising wages and making a
real commitment to workers will do more to cut crime than investing in hidden cameras.
“No other American industry,” Kinney notes, “is robbed so frequently by its own
employees.”
Few of the young fast food workers I met in Colorado Springs were aware that working
early in the morning or late at night placed them in some danger. Jose, on the other
hand, had no illusions. He was a nineteen-year-old assistant manager with a sly,
mischievous look. Before going to work at McDonald’s, Jose had been a drug courier
and a drug dealer in another state. He’d witnessed the murder of close friends. Many of
his relatives were in prison for drug-related and violent crimes. Jose had left all that
behind; his job at McDonald’s was part of a new life; and he liked being an assistant
manager because the work didn’t seem hard. He was not, however, going to rely on
McDonald’s for his personal safety. He said that video cameras weren’t installed at his
restaurant until the Teeny Beanie Babies arrived. “Man, people really want to rip those
things off,” he said. “You’ve got to keep your eye on them.” Jose often counts the
money and closes the restaurant late at night. He always brings an illegal handgun to
work, and a couple of his employees carry handguns, too. He’s not afraid of what might
happen if an armed robber walks in the door one night. “Ain’t nothing that he could do
to me,” Jose said, matter-of-factly, “that I couldn’t do to him.”
The May 2000 murder of five Wendy’s employees during a robbery in Queens, New York,
received a great deal of media attention. The killings were gruesome, one of the
murderers had previously worked at the restaurant, and the case unfolded in the media
capital of the nation. But crime and fast food have become so ubiquitous in American
society that their frequent combination usually goes unnoticed. Just a few weeks before
35
the Wendy’s massacre in Queens, two former Wendy’s employees in South Bend,
Indiana, received prison terms for murdering a pair of coworkers during a robbery that
netted $1,400. Earlier in the year two former Wendy’s employees in Anchorage, Alaska,
were charged with the murder of their night manager during a robbery. Hundreds of fast
food restaurants are robbed every week. The FBI does not compile nationwide statistics
on restaurant robberies, and the restaurant industry will not disclose them. Local
newspaper accounts, however, give a sense of these crimes.
In recent years: Armed robbers struck nineteen McDonald’s and Burger King restaurants
along Interstate 85 in Virginia and North Carolina. A former cook at a Shoney’s in
Nashville, Tennessee, became a fast food serial killer, murdering two workers at a
Captain D’s, three workers at a McDonald’s, and a pair of Baskin Robbins workers whose
bodies were later found in a state park. A dean at Texas Southern University was shot and
killed during a carjacking in the drive-through lane of a KFC in Houston. The manager of
a Wal-Mart McDonald’s in Durham, North Carolina, was shot during a robbery by two
masked assailants. A nine-year-old girl was killed during a shootout between a robber
and an off-duty police officer waiting in line at a McDonald’s in Barstow, California. A
twenty-year-old manager was killed during an armed robbery at a Sacramento,
California, McDonald’s; the manager had recognized one of the armed robbers, a
former McDonald’s employee; it was the manager’s first day in the job. A former
employee at a McDonald’s in Vallejo, California, shot three women who worked at the
restaurant after being rejected for a new job; one of the women was killed, and the
murderer left the restaurant laughing. And in Colorado Springs, a jury convicted a former
employee of first degree murder for the execution-style slayings of three teenage workers
and a female manager at a Chuck E. Cheese’s restaurant. The killings took place in
Aurora, Colorado, at closing time, and police later arrived to find a macabre scene. The
bodies lay in an empty restaurant as burglar alarms rang, game lights flashed, a vacuum
cleaner ran, and Chuck E. Cheese mechanical animals continued to perform children’s
songs.
AT THE THIRTY – EIGHTH Annual Multi-Unit Foodserver Operators Conference held a few
years ago in Los Angeles, the theme was “People: The Single Point of Difference.” Most of
the fourteen hundred attendees were chain restaurant operators and executives. The
ballroom at the Century Plaza Hotel was filled with men and women in expensive suits, a
well-to-do group whose members looked as though they hadn’t grilled a burger or
mopped a floor in a while. The conference workshops had names like “Dual Branding:
Case Studies from the Field” and “Segment Marketing: The Right Message for the Right
Market” and “In Line and on Target: The Changing Dimensions of Site Selection.” Awards
were given for the best radio and television ads. Restaurants were inducted into the Fine
Dining Hall of Fame. Chains competed to be named Operator of the Year. Foodservice
companies filled a nearby exhibition space with their latest products: dips, toppings,
condiments, high-tech ovens, the latest in pest control. The leading topic of conversation
at the scheduled workshops, in the hallways and hotel bars, was how to find inexpensive
workers in an American economy where unemployment had fallen to a twenty-four-year
low.
James C. Doherty, the publisher of Nation’s Restaurant News at the time, gave a speech
urging the restaurant industry to move away from relying on a low-wage workforce with
high levels of turnover and to promote instead the kind of labor policies that would
create long-term careers in foodservice. How can workers look to this industry for a
career, he asked, when it pays them the minimum wage and provides them no health
benefits? Doherty’s suggestions received polite applause.
36
The keynote speech was given by David Novak, the president of Tricon Global
Restaurants. His company operates more restaurants than any other company in the
world — 30,000 Pizza Huts, Taco Bells, and KFCs. A former advertising executive with a
boyish face and the earnest delivery style of a motivational speaker, Novak charmed the
crowd. He talked about the sort of recognition his company tried to give its employees,
the pep talks, the prizes, the special awards of plastic chili peppers and rubber chickens.
He believed the best way to motivate people is to have fun. “Cynics need to be in some
other industry,” he said. Employee awards created a sense of pride and esteem, they
showed that management was watching, and they did not cost a lot of money. “We
want to be a great company for the people who make it great,” Novak announced.
Other speakers talked about teamwork, empowering workers, and making it “fun.”
During the President’s Panel, the real sentiments of the assembled restaurant operators
and executives became clear. Norman Brinker — a legend in the industry, the founder of
Bennigan’s and Steak and Ale, the current owner of Chili’s, a major donor to the
Republican Party — spoke to the conference in language that was simple, direct, and
free of platitudes. “I see the possibility of unions,” he warned. The thought “chilled” him.
He asked everyone in the audience to give more money to the industry’s key lobbying
groups. “And [Senator] Kennedy’s pushing hard on a $7.25 minimum wage,” he
continued. “That’ll be fun, won’t it? I love the idea of that. I sure do — strike me dead!”
As the crowd laughed and roared and applauded Brinker’s call to arms against unions
and the government, the talk about teamwork fell into the proper perspective.
37
8. The Most Dangerous Job
ONE NIGHT I VISIT a slaughterhouse somewhere in the High Plains. The slaughterhouse is
one of the nation’s largest. About five thousand head of cattle enter it every day, single
file, and leave in a different form. Someone who has access to the plant, who’s upset by
its working conditions, offers to give me a tour. The slaughterhouse is an immense
building, gray and square, about three stories high, with no windows on the front and no
architectural clues to what’s happening inside. My friend gives me a chain-mail apron
and gloves, suggesting I try them on. Workers on the line wear about eight pounds of
chain mail beneath their white coats, shiny steel armor that covers their hands, wrists,
stomach, and back. The chain mail’s designed to protect workers from cutting
themselves and from being cut by other workers. But knives somehow manage to get
past it. My host hands me some Wellingtons, the kind of knee-high rubber boots that
English gentlemen wear in the countryside. “Tuck your pants into the boots,” he says.
“We’ll be walking through some blood.”
I put on a hardhat and climb a stairway. The sounds get louder, factory sounds, the noise
of power tools and machinery, bursts of compressed air. We start at the end of the line,
the fabricating room. Workers call it “fab.” When we step inside, fab seems familiar: steel
catwalks, pipes along the walls, a vast room, a maze of conveyer belts. This could be the
Lamb Weston plant in Idaho, except hunks of red meat ride the belts instead of french
fries. Some machines assemble cardboard boxes, others vacuum-seal subprimals of beef
in clear plastic. The workers look extremely busy, but there’s nothing unsettling about this
part of the plant. You see meat like this all the time in the back of your local supermarket.
The fab room is cooled to about 40 degrees, and as you head up the line, the feel of the
place starts to change. The pieces of meat get bigger. Workers — about half of them
women, almost all of them young and Latino — slice meat with long slender knives. They
stand at a table that’s chest high, grab meat off a conveyer belt, trim away fat, throw
meat back on the belt, toss the scraps onto a conveyer belt above them, and then grab
more meat, all in a matter of seconds. I’m now struck by how many workers there are,
hundreds of them, pressed close together, constantly moving, slicing. You see hardhats,
white coats, flashes of steel. Nobody is smiling or chatting, they’re too busy, anxiously
trying not to fall behind. An old man walks past me, pushing a blue plastic barrel filled
with scraps. A few workers carve the meat with Whizzards, small electric knives that have
spinning round blades. The Whizzards look like the Norelco razors that Santa rides in the
TV ads. I notice that a few of the women near me are sweating, even though the place
is freezing cold.
Sides of beef suspended from an overhead trolley swing toward a group of men. Each
worker has a large knife in one hand and a steel hook in the other. They grab the meat
with their hooks and attack it fiercely with their knives. As they hack away, using all their
strength, hook in the other. They grab the meat with their hooks and attack it fiercely with
their knives. As they hack away, using all their strength, grunting, the place suddenly feels
different, primordial. The machinery seems beside the point, and what’s going on before
me has been going on for thousands of years — the meat, the hook, the knife, men
straining to cut more meat.
On the kill floor, what I see no longer unfolds in a logical manner. It’s one strange image
after another. A worker with a power saw slices cattle into halves as though they were
two-by-fours, and then the halves swing by me into the cooler. It feels like a
slaughterhouse now. Dozens of cattle, stripped of their skins, dangle on chains from their
38
hind legs. My host stops and asks how I feel, if I want to go any further. This is where some
people get sick. I feel fine, determined to see the whole process, the world that’s been
deliberately hidden. The kill floor is hot and humid. It stinks of manure. Cattle have a body
temperature of about 101 degrees, and there are a lot of them in the room. Carcasses
swing so fast along the rail that you have to keep an eye on them constantly, dodge
them, watch your step, or one will slam you and throw you onto the bloody concrete
floor. It happens to workers all the time.
I see: a man reach inside cattle and pull out their kidneys with his bare hands, then drop
the kidneys down a metal chute, over and over again, as each animal passes by him; a
stainless steel rack of tongues; Whizzards peeling meat off decapitated heads, picking
them almost as clean as the white skulls painted by Georgia O’Keeffe. We wade through
blood that’s ankle deep and that pours down drains into huge vats below us. As we
approach the start of the line, for the first time I hear the steady pop, pop, pop of live
animals being stunned.
Now the cattle suspended above me look just like the cattle I’ve seen on ranches for
years, but these ones are upside down swinging on hooks. For a moment, the sight seems
unreal; there are so many of them, a herd of them, lifeless. And then I see a few hind legs
still kicking, a final reflex action, and the reality comes hard and clear.
For eight and a half hours, a worker called a “sticker” does nothing but stand in a river of
blood, being drenched in blood, slitting the neck of a steer every ten seconds or so,
severing its carotid artery. He uses a long knife and must hit exactly the right spot to kill
the animal humanely. He hits that spot again and again. We walk up a slippery metal
stairway and reach a small platform, where the production line begins. A man turns and
smiles at me. He wears safety goggles and a hardhat. His face is splattered with gray
matter and blood. He is the “knocker,” the man who welcomes cattle to the building.
Cattle walk down a narrow chute and pause in front of him, blocked by a gate, and
then he shoots them in the head with a captive bolt stunner — a compressed-air gun
attached to the ceiling by a long hose — which fires a steel bolt that knocks the cattle
unconscious. The animals keep strolling up, oblivious to what comes next, and he stands
over them and shoots. For eight and a half hours, he just shoots. As I stand there, he
misses a few times and shoots the same animal twice. As soon as the steer falls, a worker
grabs one of its hind legs, shackles it to a chain, and the chain lifts the huge animal into
the air.
I watch the knocker knock cattle for a couple of minutes. The animals are powerful and
imposing one moment and then gone in an instant, suspended from a rail, ready for
carving. A steer slips from its chain, falls to the ground, and gets its head caught in one
end of a conveyer belt. The production line stops as workers struggle to free the steer,
stunned but alive, from the machinery. I’ve seen enough.
I step out of the building into the cool night air and follow the path that leads cattle into
the slaughterhouse. They pass me, driven toward the building by workers with long white
sticks that seem to glow in the dark. One steer, perhaps sensing instinctively what the
other don’t, turns and tries to run. But workers drive him back to join the rest. The cattle
lazily walk single-file toward the muffled sounds, pop, pop, pop, coming from the open
door.
The path has hairpin turns that prevent cattle from seeing what’s in store and keep them
relaxed. As the ramp gently slopes upward, the animals may think they’re headed for
39
another truck, another road trip — and they are, in unexpected ways. The ramp widens
as it reaches ground level and then leads to a large cattle pen with wooden fences, a
corral that belongs in a meadow, not here. As I walk along the fence, a group of cattle
approach me, looking me straight in the eye, like dogs hoping for a treat, and follow me
out of some mysterious impulse. I stop and try to absorb the whole scene: the cool
breeze, the cattle and their gentle lowing, a cloudless sky, steam rising from the plant in
the moonlight. And then I notice that the building does have one window, a small square
of light on the second floor. It offers a glimpse of what’s hidden behind this huge blank
façade. Through the little window you can see bright red carcasses on hooks, going
round and round.
KNOCKER, STICKER, SHACKLER, RUMPER, First Legger, Knuckle Dropper, Navel Boner,
Splitter Top/Bottom Butt, Feed Kill Chain — the names of job assignments at a modern
slaughterhouse convey some of the brutality inherent in the work. Meatpacking is now
the most dangerous job in the United States. The injury rate in a slaughterhouse is about
three times higher than the rate in a typical American factory. Every year more than onequarter of the meatpacking workers in this country — roughly forty thousand men and
women — suffer an injury or a work- related illness that requires medical attention
beyond first aid. There is strong evidence that these numbers, compiled by the Bureau of
Labor Statistics, understate the number of meatpacking injuries that occur. Thousands of
additional injuries and illnesses most likely go unrecorded.
Despite the use of conveyer belts, forklifts, dehiding machines, and a variety of power
tools, most of the work in the nation’s slaughterhouses is still performed by hand. Poultry
plants can be largely mechanized, thanks to the breeding of chickens that are uniform in
size. The birds in some Tyson factories are killed, plucked, gutted, beheaded, and sliced
into cutlets by robots and machines. But cattle still come in all sizes and shapes, varying in
weight by hundreds of pounds. The lack of a standardized steer has hindered the
mechanization of beef plants. In one crucial respect meatpacking work has changed
little in the past hundred years. At the dawn of the twenty-first century, amid an era of
extraordinary technological advance, the most important tool in a modern
slaughterhouse is a sharp knife.
Lacerations are the most common injuries suffered by meatpackers, who often stab
themselves or stab someone working nearby. Tendinitis and cumulative trauma disorders
are also quite common. Meatpacking workers routinely develop back problems,
shoulder problems, carpal tunnel syndrome, and “trigger finger” (a syndrome in which a
finger becomes frozen in a curled position). Indeed, the rate of these cumulative trauma
injuries in the meatpacking industry is far higher than the rate in any other American
industry. It is roughly thirty-three times higher than the national average in industry. Many
slaughterhouse workers make a knife cut every two or three seconds, which adds up to
about 10,000 cuts during an eight-hour shift. If the knife has become dull, additional
pressure is placed on the worker’s tendons, joints, and nerves. A dull knife can cause pain
to extend from the cutting hand all the way down the spine.
Workers often bring their knives home and spend at least forty minutes a day keeping the
edges smooth, sharp, and sanded, with no pits. One IBP worker, a small Guatemalan
woman with graying hair, spoke with me in the cramped kitchen of her mobile home. As
a pot of beans cooked on the stove, she sat in a wooden chair, gently rocking, telling
the story of her life, of her journey north in search of work, the whole time sharpening big
knives in her lap as though she were knitting a sweater.
40
The “IBP revolution” has been directly responsible for many of the hazards that
meatpacking workers now face. One of the leading determinants of the injury rate at a
slaughterhouse today is the speed of the disassembly line. The faster it runs, the more
likely that workers determinants of the injury rate at a slaughterhouse today is the speed
of the disassembly line. The faster it runs, the more likely that workers will get hurt. The old
meatpacking plants in Chicago slaughtered about 50 cattle an hour. Twenty years ago,
new plants in the High Plains slaughtered about 175 cattle an hour. Today some plants
slaughter up to 400 cattle an hour — about half a dozen animals every minute, sent
down a single production line, carved by workers desperate not to fall be-hind. While
trying to keep up with the flow of meat, workers often neglect to resharpen their knives
and thereby place more stress on their bodies. As the pace increases, so does the risk of
accidental cuts and stabbings. “I could always tell the line speed,” a former Monfort
nurse told me, “by the number of people with lacerations coming into my office.” People
usually cut themselves; nevertheless, everyone on the line tries to stay alert. Meatpackers
often work within inches of each other, wielding large knives. A simple mistake can cause
a serious injury. A former IBP worker told me about boning knives suddenly flying out of
hands and ricocheting off of machinery. “They’re very flexible,” she said, “and they’ll
spring on you... zwing, and they’re gone.”
Much like french fry factories, beef slaughterhouses often operate at profit margins as
low as a few pennies a pound. The three meatpacking giants — ConAgra, IBP, and Excel
— try to increase their earnings by maximizing the volume of production at each plant.
Once a slaughterhouse is up and running, fully staffed, the profits it will earn are directly
related to the speed of the line. A faster pace means higher profits. Market pressures
now exert a perverse influence on the management of beef plants: the same factors
that make these slaughterhouses relatively inefficient (the lack of mechanization, the
reliance on human labor) encourage companies to make them even more dangerous
(by speeding up the pace).
The unrelenting pressure of trying to keep up with the line has encouraged widespread
methamphetamine use among meatpackers. Workers taking “crank” feel charged and
self-confident, ready for anything. Supervisors have been known to sell crank to their
workers or to supply it free in return for certain favors, such as working a second shift.
Workers who use methamphetamine may feel energized and invincible, but are actually
putting themselves at much greater risk of having an accident. For obvious reasons, a
modern slaughterhouse is not a safe place to be high.
In the days when labor unions were strong, workers could complain about excessive line
speeds and injury rates without fear of getting fired. Today only one-third of IBP’s workers
belong to a union. Most of the nonunion workers are recent immigrants; many are
illegals; and they are generally employed “at will.” That means they can be fired without
warning, for just about any reason. Such an arrangement does not encourage them to
lodge complaints. Workers who have traveled a great distance for this job, who have
families to support, who are earning ten times more an hour in a meatpacking plant than
they could possibly earn back home, are wary about speaking out and losing everything.
The line speeds and labor costs at IBP’s nonunion plants now set the standard for the rest
of the industry. Every other company must try to produce beef as quickly and cheaply as
IBP does; slowing the pace to protect workers can lead to a competitive disadvantage.
Again and again workers told me that they are under tremendous pressure not to report
injuries. The annual bonuses of plant foremen and supervisors are often based in part on
the injury rate of their workers. Instead of creating a safer workplace, these bonus
41
schemes encourage slaughterhouse managers to make sure that accidents and injuries
go unreported. Missing fingers, broken bones, deep lacerations, and amputated limbs
are difficult to conceal from authorities. But the dramatic and catastrophic injuries in a
slaughterhouse are greatly outnumbered by less visible, though no less debilitating,
ailments: torn muscles, slipped disks, pinched nerves.
If a worker agrees not to report an injury, a supervisor will usually shift him or her to an
easier job for a while, providing some time to heal. If the injury seems more serious, a
Mexican worker is often given the opportunity to return home for a while, to recuperate
there, then come back to his or her slaughterhouse job in the United States. Workers who
abide by these unwritten rules are treated respectfully; those who disobey are likely to be
punished and made an example. As one former IBP worker explained, “They’re trying to
deter you, period, from going to the doctor.”
From a purely economic point of view, injured workers are a drag on profits. They are less
productive. Getting rid of them makes a good deal of financial sense, especially when
new workers are readily available and inexpensive to train. Injured workers are often
given some of the most unpleasant tasks in the slaughterhouse. Their hourly wages are
cut. And through a wide variety of unsubtle means they are encouraged to quit.
Not all supervisors in a slaughterhouse behave like Simon Legree, shouting at workers,
cursing them, belittling their injuries, always pushing them to move faster. But enough
supervisors act that way to warrant the comparison. Production supervisors tend to be
men in their late twenties and early thirties. Most are Anglos and don’t speak Spanish,
although more and more Latinos are being promoted to the job. They earn about
$30,000 a year, plus bonuses and benefits. In many rural communities, being a supervisor
at a meatpacking plant is one of the best jobs in town. It comes with a fair amount of
pressure: a supervisor must meet production goals, keep the number of recorded injuries
low, and most importantly, keep the meat flowing down the line without interruption. The
job also brings enormous power. Each supervisor is like a little dictator in his or her section
of the plant, largely free to boss, fire, berate, or reassign workers. That sort of power can
lead to all sorts of abuses, especially when the hourly workers being supervised are
women.
Many women told me stories about being fondled and grabbed on the production line,
and the behavior of supervisors sets the tone for the other male workers. In February of
1999, a federal jury in Des Moines awarded $2.4 million to a female employee at an IBP
slaughterhouse. According to the woman’s testimony, coworkers had “screamed
obscenities and rubbed their bodies against hers while supervisors laughed.” Seven
months later, Monfort agreed to settle a lawsuit filed by the U.S. Equal Employment
Opportunity Commission on behalf of fourteen female workers in Texas. As part of the
settlement, the company paid the women $900,000 and vowed to establish formal
procedures for handling sexual harassment complaints. In their lawsuit the women
alleged that supervisors at a Monfort plant in Cactus, Texas, pressured them for dates
and sex, and that male coworkers groped them, kissed them, and used animal parts in a
sexually explicit manner.
The sexual relationships between supervisors and “hourlies” are for the most part
consensual. Many female workers optimistically regard sex with their supervisor as a way
to gain a secure place in American society, a green card, a husband — or at the very
least a transfer to an easier job at the plant. Some supervisors become meatpacking
Casanovas, engaging in multiple affairs. Sex, drugs, and slaughterhouses may seem an
unlikely combination, but as one former Monfort employee told me: “Inside those walls is
42
a different world that obeys different laws.” Late on the second shift, when it’s dark
outside, assignations take place in locker rooms, staff rooms, and parked cars, even on
the catwalk over the kill floor.
SOME OF THE MOST dangerous jobs in meatpacking today are performed by the latenight cleaning crews. A large proportion of these workers are illegal immigrants. They are
considered “independent contractors,” employed not by the meatpacking firms but by
sanitation companies. They earn hourly wages that are about one-third lower than those
of regular production employees. And their work is so hard and so
They earn hourly wages that are about one-third lower than those of regular production
employees. And their work is so hard and so horrendous that words seem inadequate to
describe it. The men and women who now clean the nation’s slaughterhouses may
arguably have the worst job in the United States. “It takes a really dedicated person,” a
former member of a cleaning crew told me, “or a really desperate person to get the job
done.”
When a sanitation crew arrives at a meatpacking plant, usually around midnight, it faces
a mess of monumental proportions. Three to four thousand cattle, each weighing about
a thousand pounds, have been slaughtered there that day. The place has to be clean
by sunrise. Some of the workers wear water-resistant clothing; most don’t. Their principal
cleaning tool is a high-pressure hose that shoots a mixture of water and chlorine heated
to about 180 degrees. As the water is sprayed, the plant fills with a thick, heavy fog.
Visibility drops to as little as five feet. The conveyer belts and machinery are running.
Workers stand on the belts, spraying them, riding them like moving sidewalks, as high as
fifteen feet off the ground. Workers climb ladders with hoses and spray the catwalks.
They get under tables and conveyer belts, climbing right into the bloody muck, cleaning
out grease, fat, manure, leftover scraps of meat.
Glasses and safety goggles fog up. The inside of the plant heats up; temperatures soon
exceed 100 degrees. “It’s hot, and it’s foggy, and you can’t see anything,” a former
sanitation worker said. The crew members can’t see or hear each other when the
machinery’s running. They routinely spray each other with burning hot, chemical-laden
water. They are sickened by the fumes. Jesus, a soft-spoken employee of DCS Sanitation
Management, Inc., the company that IBP uses in many of its plants, told me that every
night on the job he gets terrible headaches. “You feel it in your head,” he said. “You feel
it in your stomach, like you want to throw up.” A friend of his vomits whenever they clean
the rendering area. Other workers tease the young man as he retches. Jesus says the
stench in rendering is so powerful that it won’t wash off; no matter how much soap you
use after a shift, the smell comes home with you, seeps from your pores.
One night while Jesus was cleaning, a coworker forgot to turn off a machine, lost two
fingers, and went into shock. An ambulance came and took him away, as everyone else
continued to clean. He was back at work the following week. “If one hand is no good,”
the supervisor told him, “use the other.” Another sanitation worker lost an arm in a
machine. Now he folds towels in the locker room. The scariest job, according to Jesus, is
cleaning the vents on the roof of the slaughterhouse. The vents become clogged with
grease and dried blood. In the winter, when everything gets icy and the winds pick up,
Jesus worries that a sudden gust will blow him off the roof into the darkness.
Although official statistics are not kept, the death rate among slaughterhouse sanitation
crews is extraordinarily high. They are the ultimate in disposable workers: illegal, illiterate,
impoverished, untrained. The nation’s worst job can end in just about the worst way.
43
Sometimes these workers are literally ground up and reduced to nothing.
A brief description of some cleaning-crew accidents over the past decade says more
about the work and the danger than any set of statistics. At the Monfort plant in Grand
Island, Nebraska, Richard Skala was beheaded by a dehiding machine. Carlos Vincente
— an employee of T and G Service Company, a twenty-eight-year-old Guatemalan
who’d been in the United States for only a week — was pulled into the cogs of a
conveyer belt at an Excel plant in Fort Morgan, Colorado, and torn apart. Lorenzo Marin,
Sr., an employee of DCS Sanitation, fell from the top of a skinning machine while
cleaning it with a high-pressure hose, struck his head on the concrete floor of an IBP plant
in Columbus Junction, Iowa, and died. Another employee of DCS Sanitation, Salvador
Hernandez-Gonzalez, had his head crushed by a pork-loin processing machine at an IBP
plant in Madison, Nebraska. The same machine had fatally crushed the head of another
worker, Ben Barone, a few years earlier. At a National Beef plant in Liberal, Kansas,
Homer Stull climbed into a blood-collection tank to clean it, a filthy tank thirty feet high.
Stull was overcome by hydrogen sulfide fumes. Two coworkers climbed into the tank and
tried to rescue him. All three men died. Eight years earlier, Henry Wolf had been
overcome by hydrogen sulfide fumes while cleaning the very same tank; Gary Sanders
had tried to rescue him; both men died; and the Occupational Safety and Health
Administration (OSHA) later fined National Beef for its negligence. The fine was $480 for
each man’s death.
DURING THE SAME YEARS when the working conditions at America’s meatpacking plants
became more dangerous — when line speeds increased and illegal immigrants
replaced skilled workers — the federal government greatly reduced the enforcement of
health and safety laws. OSHA had long been despised by the nation’s manufacturers,
who considered the agency a source of meddlesome regulations and unnecessary red
tape. When Ronald Reagan was elected president in 1980, OSHA was already
underfunded and understaffed: its 1,300 inspectors were responsible for the safety of
more than 5 million workplaces across the country. A typical American employer could
expect an OSHA inspection about once every eighty years. Nevertheless, the Reagan
administration was determined to reduce OSHA’s authority even further, as part of the
push for deregulation. The number of OSHA inspectors was eventually cut by 20 percent,
and in 1981 the agency adopted a new policy of “voluntary compliance.” Instead of
arriving unannounced at a factory and performing an inspection, OSHA employees were
required to look at a company’s injury log before setting foot inside the plant. If the
records showed an injury rate at the factory lower than the national average for all
manufacturers, the OSHA inspector had to turn around and leave at once — without
entering the plant, examining its equipment, or talking to any of its workers. These injury
logs were kept and maintained by company officials.
For most of the 1980s OSHA’s relationship with the meatpacking industry was far from
adversarial. While the number of serious injuries rose, the number of OSHA inspections fell.
The death of a worker on the job was punished with a fine of just a few hundred dollars.
At a gathering of meat company executives in October of 1987, OSHA’s safety director,
Barry White, promised to change federal safety standards that “appear amazingly stupid
to you or overburdening or just not useful.” According to an account of the meeting later
published in the Chicago Tribune, the safety director at OSHA — the federal official most
responsible for protecting the lives of meatpacking workers — acknowledged his own
lack of qualification for the job. “I know very well that you know more about safety and
health in the meat industry than I do,” White told the executives. “And you know more
about safety and health in the meat industry than any single employee at OSHA.”
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OSHA’s voluntary compliance policy did indeed reduce the number of recorded injuries
in meatpacking plants. It did not, however, reduce the number of people getting hurt. It
merely encouraged companies, in the words of a subsequent congressional
investigation, “to understate injuries, to falsify records, and to cover up accidents.” At the
IBP beef plant in Dakota City, Nebraska, for example, the company kept two sets of
injury logs: one of them recording every injury and illness at the slaughterhouse, the other
provided to visiting OSHA inspectors and researchers from the Bureau of Labor Statistics.
During a three-month period in 1985, the first log recorded 1,800 injuries and illnesses at
the plant. The OSHA log recorded only 160 — a discrepancy of more than 1,000 percent.
At congressional hearings on meatpacking in 1987, Robert L. Peterson, the chief
executive of IBP, denied under oath that two sets of logs were ever kept and called IBP’s
safety record “the best of the best.” Congressional investigators later got hold of both
logs — and found that the injury rate at its Dakota City plant was as much as one-third
higher than the average rate in the meatpacking industry. Congressional investigators
also discovered that IBP had altered injury records at its beef plant in Emporia, Kansas.
Another leading meatpacking company, John Morrell, was caught lying about injuries at
its plant in Sioux Falls, South Dakota. The congressional investigation concluded that
these companies had failed to report “serious injuries such as fractures, concussions,
major cuts, hernias, some requiring hospitalization, surgery, even amputation.”
Congressman Tom Lantos, whose subcommittee conducted the meatpacking inquiry,
called IBP “one of the most irresponsible and reckless corporations in America.” A Labor
Department official called the company’s behavior “the worst example of
underreporting injuries and illnesses to workers ever encountered in OSHA’s sixteen-year
history.” Nevertheless, Robert L. Peterson was never charged with perjury for his
misleading testimony before Congress. Investigators argued that it would be difficult to
prove “conclusively” that Peterson had “willfully” lied. In 1987 IBP was fined $2.6 million by
OSHA for underreporting injuries and later fined an additional $3.1 million for the high rate
of cumulative trauma injuries at the Dakota City plant. After the company introduced a
new safety program there, the fines were reduced to $975,000 — a sum that might have
appeared large at the time, yet represented about one one-hundredth of a percent of
IBP’s annual revenues.
Three years after the OSHA fines, a worker named Kevin Wilson injured his back at an IBP
slaughterhouse in Council Bluffs, Iowa. Wilson went to see Diane Arndt, a nurse at the
plant, who sent him to a doctor selected by the company. Wilson’s injury was not serious,
the doctor said, later assigning him to light duty at the plant. Wilson sought a second
opinion; the new doctor said that he had a disk injury that required a period of absence
from work. When Wilson stopped reporting for light duty, IBP’s corporate security
department began to conduct surveillance of his house. Eleven days after Wilson’s new
doctor told IBP that back surgery might be required, Diane Arndt called the doctor and
said that IBP had obtained a videotape of Wilson engaging in strenuous physical
activities at home. The doctor felt deceived, met with Wilson, accused him of being a
liar, refused to provide him with any more treatment, and told him to get back to work.
Convinced that no such videotape existed and that IBP had fabricated the entire story in
order to deny him medical treatment, Kevin Wilson sued the company for slander.
The lawsuit eventually reached the Iowa Supreme Court. In a decision that received little
media attention, the Supreme Court upheld a lower court’s award of $2 million to Wilson
and described some of IBP’s unethical practices. The court found that seriously injured
45
workers were required to show up at the IBP plant briefly each day so that the company
could avoid reporting “lost workdays” to OSHA. Some workers were compelled to show
up for work on the same day as a surgery or the day after an amputation. “IBP’s
management was aware of, and participated in, this practice,” the Iowa Supreme Court
noted. IBP nurses regularly entered false information into the plant’s computer system,
reclassifying injuries so that they didn’t have to be reported to OSHA. Injured workers who
proved uncooperative were assigned to jobs “watching gauges in the rendering plant,
where they were subjected to an atrocious smell while hog remains were boiled down
into fertilizers and blood was drained into tanks.” According to evidence introduced in
court, Diane Arndt had a low opinion of the workers whose injuries she was supposed to
be treating. The IBP nurse called them “idiots” and “jerks,” telling doctors that “this guy’s
a crybaby” and “this guy’s full of shit.” She later admitted that Wilson’s back injury was
legitimate. The Iowa Supreme Court concluded that the lies she told in this medical case,
as well as in others, had been partly motivated by IBP’s financial incentive program,
which gave staff members bonuses and prizes when the number of lost workdays was
kept low. The program, in the court’s opinion, was “somewhat disingenuously called ‘the
safety award system.’”
IBP’s attitude toward worker safety was hardly unique in the industry, according to
Edward Murphy’s testimony before Congress in 1992. Murphy had served as the safety
director of the Monfort beef plant in Grand Island. After two workers were killed there in
1991, Monfort fired him. Murphy claimed that he had battled the company for years over
safety issues and that Monfort had unfairly made him the scapegoat for its own illegal
behavior. The company later paid him an undisclosed sum of money to settle a civil
lawsuit over wrongful termination.
Murphy told Congress that during his tenure at the Grand Island plant, Monfort
maintained two sets of injury logs, routinely lied to OSHA, and shredded documents
requested by OSHA. He wanted Congress to know that the safety lapses at the plant
were not accidental. They stemmed directly from Monfort’s corporate philosophy, which
Murphy described in these terms: “The first commandment is that only production
counts... The employee’s duty is to follow orders. Period. As I was repeatedly told, ‘Do
what I tell you, even if it is illegal... Don’t get caught.”’
A lawsuit filed in May of 1998 suggests that little has changed since IBP was caught
keeping two sets of injury logs more than a decade ago. Michael D. Ferrell, a former vice
president at IBP, contends that the real blame for the high injury rate at the company lies
not with the workers, supervisors, nurses, safety directors, or plant managers, but with IBP’s
top executives. Ferrell had ample opportunity to observe their decision-making process.
Among other duties, he was in charge of the health and safety programs at IBP.
When Ferrell accepted the job in 1991, after many years as an industrial engineer at
other firms, he believed that IBP’s desire to improve worker safety was sincere. According
to his legal complaint, Ferrell later discovered that IBP’s safety records were routinely
falsified and that the company cared more about production than anything else. Ferrell
was fired by IBP in 1997, not long after a series of safety problems at a slaughterhouse in
Palestine, Texas. The circumstances surrounding his firing are at the heart of the lawsuit.
On December 4, 1996, an OSHA inspection of the Palestine plant found a number of
serious violations and imposed a fine of $35,125. Less than a week later, a worker named
Clarence Dupree lost an arm in a bone-crushing machine. And two days after that,
another worker, Willie Morris, was killed by an ammonia gas explosion. Morris’s body lay
on the floor for hours, just ten feet from the door, as toxic gas filled the building. Nobody
46
at the plant had been trained to use hazardous-materials gas masks or protective suits;
the equipment sat in a locked storage room. Ferrell flew to Texas and toured the plant
after the accidents. He thought the facility was in terrible shape — with a cooling system
that violated OSHA standards, faulty wiring that threatened to cause a mass
electrocution, and safety mechanisms that had deliberately been disabled with
magnets. He wanted the slaughterhouse to be shut down immediately, and it was. Two
months later, Ferrell lost his job.
In his lawsuit seeking payment for wrongful termination, Ferrell contends that he was fired
for giving the order to close the Palestine plant. He claims that IBP had never before shut
down a slaughterhouse purely for safety reasons and that Robert L. Peterson was
enraged by the decision. IBP disputes this version of events, contending that Ferrell had
never fit into IBP’s corporate culture, that he delegated too much authority, and that he
had not, in fact, made the decision to shut down the Palestine plant. According to IBP,
the decision to shut it was made after a unanimous vote by its top executives.
IBP’s Palestine slaughterhouse reopened in January of 1997. It was shut down again a
year later —this time by the USDA. Federal inspectors cited the plant for “inhumane
slaughter” and halted production there for one week, an extremely rare penalty
imposed for the mistreatment of cattle. In 1999 IBP closed the plant. As of this writing, it
sits empty, awaiting a buyer.
WHEN I FIRST VISITED Greeley in 1997, Javier Ramirez was president of the UFCW, Local
990, the union representing employees at the Monfort beef plant. The National Labor
Relations Board had ruled that Monfort committed “numerous, pervasive, and
outrageous” violations of labor law after reopening the Greeley beef plant in 1982,
discriminating against former union members at hiring time and intimidating new workers
during a union election. Former employees who’d been treated unfairly ultimately
received a $10.6 million settlement. After a long and arduous organizing drive, workers at
the Monfort beef plant voted to join the UFCW in 1992. Javier Ramirez is thirty-one and
knows a fair amount about beef. His father is Ruben Ramirez, the Chicago union leader.
Javier grew up around slaughterhouses and watched the meatpacking industry
abandon his hometown for the High Plains. Instead of finding another line of work, he
followed the industry to Colorado, trying to gain better wages and working conditions for
the mainly Latino workforce.
The UFCW has given workers in Greeley the ability to challenge unfair dismissals, file
grievances against supervisors, and report safety lapses without fear of reprisal. But the
union’s power is limited by the plant’s high turnover rate. Every year a new set of workers
must be persuaded to support the UFCW. The plant’s revolving door is not conducive to
worker solidarity. At the moment some of the most pressing issues for the UFCW are
related to the high injury rate at the slaughterhouse. It is a constant struggle not only to
prevent workers from getting hurt, but also to gain them proper medical treatment and
benefits once they’ve been hurt.
Colorado was one of the first states to pass a workers’ compensation law. The idea
behind the legislation, enacted in 1919, was to provide speedy medical care and a
steady income to workers injured on the job. Workers’ comp was meant to function
much like no-fault insurance. In return for surrendering the right to sue employers for
injuries, workers were supposed to receive immediate benefits. Similar workers’ comp
plans were adopted throughout the United States. In 1991, Colorado started another
trend, becoming one of the first states to impose harsh restrictions on workers’ comp
47
payments. In addition to reducing the benefits afforded to injured employees,
Colorado’s new law granted employers the right to choose the physician who’d
determine the severity of any work-related ailment. Enormous power over workers’ comp
claims was handed to company doctors.
Many other states subsequently followed Colorado’s lead and cut back their workers’
comp benefits. The Colorado bill, promoted as “workers’ comp reform,” was first
introduced in the legislature by Tom Norton, the president of the Colorado State Senate
and a conservative Republican. Norton represented Greeley, where his wife, Kay, was
the vice president of legal and governmental affairs at ConAgra Red Meat.
In most businesses, a high injury rate would prompt insurance companies to demand
changes in the workplace. But ConAgra, IBP, and the other large meatpacking firms are
self-insured. They are under no pressure from independent underwriters and have a
strong incentive to keep workers’ comp payments to a bare minimum. Every penny
spent on workers’ comp is one less penny of corporate revenue.
Javier Ramirez began to educate Monfort workers about their legal right to get workers’
comp benefits after an injury at the plant. Many workers don’t realize that such insurance
even exists. The workers’ comp claim forms look intimidating, especially to people who
don’t speak any English and can’t read any language: Filing a claim, challenging a
powerful meatpacking company, and placing faith in the American legal system
requires a good deal of courage, especially for a recent immigrant.
When a workers’ comp claim involves an injury that is nearly impossible to refute (such as
an on-the-job amputation), the meatpacking companies generally agree to pay. But
when injuries are less visible (such as those stemming from cumulative trauma) the
meatpackers often prolong the whole workers’ comp process through litigation, insisting
upon hearings and filing seemingly endless appeals. Some of the most painful and
debilitating injuries are the hardest to prove.
Today it can take years for an injured worker to receive workers’ comp benefits. During
that time, he or she must pay medical bills and find a source of income. Many rely on
public assistance. The ability of meatpacking firms to delay payment discourages many
injured workers from ever filing workers’ comp claims. It leads others to accept a
reduced sum of money as part of a negotiated settlement in order to cover medical bills.
The system now leaves countless unskilled and uneducated manual workers poorly
compensated for injuries that will forever hamper their ability to earn a living. The few
who win in court and receive full benefits are hardly set for life. Under Colorado’s new
law, the payment for losing an arm is $36,000. An amputated finger gets you anywhere
from $2,200 to $4,500, depending on which one is lost. And “serious permanent
disfigurement about the head, face, or parts of the body normally exposed to public
view” entitles you to a maximum of $2,000.
As workers’ comp benefits have become more difficult to obtain, the threat to
workplace safety has grown more serious. During the first two years of the Clinton
administration, OSHA seemed like a revitalized agency. It began to draw up the first
ergonomics standards for the nation’s manufacturers, aiming to reduce cumulative
trauma disorders. The election of 1994, however, marked a turning point. The Republican
majority in Congress that rose to power that year not only impeded the adoption of
ergonomics standards but also raised questions about the future of OSHA. Working
closely with the U.S. Chamber of Commerce and the National Association of
48
Manufacturers, House Republicans have worked hard to limit OSHA’s authority.
Congressman Cass Ballenger, a Republican from North Carolina, introduced legislation
that would require OSHA to spend at least half of its budget on “consultation” with
businesses, instead of enforcement. This new budget requirement would further reduce
the number of OSHA inspections, which by the late 1990s had already reached an alltime low. Ballenger has long opposed OSHA inspections, despite the fact that near his
own district a fire at a poultry plant killed twenty-five workers in 1991. The plant had never
been inspected by OSHA, its emergency exits had been chained shut, and the bodies of
workers were found in piles near the locked doors. Congressman Joel Hefley, a Colorado
Republican whose district includes Colorado Springs, has introduced a bill that makes
Ballenger’s seem moderate. Hefley’s “OSHA Reform Act” would essentially repeal the
Occupational Safety and Health Act of 1970. It would forbid OSHA from conducting any
workplace inspections or imposing any fines.
DURING MY TRIPS TO meatpacking towns in the High Plains I met dozens of workers who’d
been injured. Each of their stories was different, yet somehow familiar, linked by common
elements — the same struggle to receive proper medical care, the same fear of
speaking out, the same underlying corporate indifference. We are human beings, more
than one person told me, but they treat us like animals. The workers I met wanted their
stories to be told. They wanted people to know about what is happening right now. A
young woman who’d injured her back and her right hand at the Greeley plant said to
me, “I want to get on top of a rooftop and scream my lungs out so that somebody will
hear.” The voices and faces of these workers are indelibly with me, as is the sight of their
hands, the light brown skin crisscrossed with white scars. Although I cannot tell all of their
stories, a few need to be mentioned. Like all lives, they can be used as examples or serve
as representative types. But ultimately they are unique, individual, impossible to define or
replace — the opposite of how this sys-tem has treated them. Raoul was born in
Zapoteca, Mexico, and did construction work in Anaheim before moving to Colorado.
He speaks no English. After hearing a Monfort ad on a Spanish-language radio station, he
applied for a job at the Greeley plant. One day Raoul reached into a processing
machine to remove a piece of meat. The machine accidentally went on. Raoul’s arm
got stuck, and it took workers twenty minutes to get it out. The machine had to be taken
apart. An ambulance brought Raoul to the hospital, where a deep gash in his shoulder
was sewn shut. A tendon had been severed. After getting stitches and a strong
prescription painkiller, he was driven back to the slaughterhouse and put back on the
production line. Bandaged, groggy, and in pain, one arm tied in a sling, Raoul spent the
rest of the day wiping blood off cardboard boxes with his good hand.
Renaldo was another Monfort worker who spoke no English, an older man with graying
hair. He developed carpal tunnel syndrome while cutting meat. The injury got so bad
that sharp pain shot from his hand all the way up to his shoulder. At night it hurt so much
he could not fall asleep in bed. Instead he would fall asleep sitting in a chair beside the
bed where his wife lay. For three years he slept in that chair every night.
Kenny Dobbins was a Monfort employee for almost sixteen years. He was born in Keokuk,
Iowa, had a tough childhood and an abusive stepfather, left home at the age of
thirteen, went in and out of various schools, never learned to read, did various odd jobs,
and wound up at the Monfort slaughterhouse in Grand Island, Nebraska. He started
working there in 1979, right after the company bought it from Swift. He was twenty-four.
He worked in the shipping department at first, hauling boxes that weighed as much as
120 pounds. Kenny could handle it, though. He was a big man, muscular and six-footfive, and nothing in his life had ever been easy.
49
One day Kenny heard someone yell, “Watch out!” then turned around and saw a ninetypound box falling from an upper level of the shipping department. Kenny caught the
box with one arm, but the momentum threw him against a conveyer belt, and the metal
rim of the belt pierced his lower back. The company doctor bandaged Kenny’s back
and said the pain was just a pulled muscle. Kenny never filed for workers’ comp, stayed
home for a few days, then returned to work. He had a wife and three children to support.
For the next few months, he was in terrible pain. “It hurt so fucking bad you wouldn’t
believe it,” he told me. He saw another doctor, got a second opinion. The new doctor
said Kenny had a pair of severely herniated disks. Kenny had back surgery, spent a
month in the hospital, got sent to a pain clinic when the operation didn’t work. His
marriage broke up amid the stress and financial difficulty. Fourteen months after the
injury, Kenny returned to the slaughterhouse. “GIVE UP AFTER BACK SURGERY? NOT KEN
DOBBINS!!” a Monfort newsletter proclaimed. “Ken has learned how to handle the rigors
of working in a packing plant and is trying to help others do the same. Thanks, Ken, and
keep up the good work.”
Kenny felt a strong loyalty to Monfort. He could not read, possessed few skills other than
his strength, and the company had still given him a job. When Monfort decided to
reopen its Greeley plant with a nonunion workforce, Kenny volunteered to go there and
help. He did not think highly of labor unions. His supervisors told him that unions had been
responsible for shutting down meatpacking plants all over the country. When the UFCW
tried to organize the Greeley slaughterhouse, Kenny became an active and outspoken
member of an anti-union group.
At the Grand Island facility, Kenny had been restricted to light duty after his injury. But his
supervisor in Greeley said that old restrictions didn’t apply in this new job. Soon Kenny
was doing tough, physical labor once again, wielding a knife and grabbing forty- to fiftypound pieces of beef off a table. When the pain became unbearable, he was
transferred to ground beef, then to rendering. According to a former manager at the
Greeley plant, Monfort was trying to get rid of Kenny, trying to make his work so
unpleasant that he’d quit. Kenny didn’t realize it. “He still believes in his heart that people
are honest and good,” the former manager said about Kenny. “And he’s wrong.”
As part of the job in rendering, Kenny sometimes had to climb into gigantic blood tanks
and gut bins, reach to the bottom of them with his long arms, and unclog the drains.
One day he was unexpectedly called to work over the weekend. There had been a
problem with Salmonella contamination. The plant needed to be disinfected, and some
of the maintenance workers had refused to do it. In his street clothes, Kenny began
cleaning the place, climbing into tanks and spraying a liquid chlorine mix. Chlorine is a
hazardous chemical that can be inhaled or absorbed through the skin, causing a litany
of health problems. Workers who spray it need to wear protective gloves, safety goggles,
a self-contained respirator, and full coveralls. Kenny’s supervisor gave him a paper dust
mask to wear, but it quickly dissolved. After eight hours of working with the chlorine in
unventilated areas, Kenny went home and fell ill. He was rushed to the hospital and
placed in an oxygen tent. His lungs had been burned by the chemicals. His body was
covered in blisters. Kenny spent a month in the hospital.
Kenny eventually recovered from the overexposure to chlorine, but it left his chest feeling
raw, made him susceptible to colds and sensitive to chemical aromas. He went back to
work at the Greeley plant. He had remarried, didn’t know what other kind of work to do,
still felt loyal to the company. He was assigned to an early morning shift. He had to drive
50
an old truck from one part of the slaughterhouse complex to another. The truck was filled
with leftover scraps of meat. The headlights and the wipers didn’t work. The windshield
was filthy and cracked. One cold, dark morning in the middle of winter, Kenny became
disoriented while driving. He stopped the truck, opened the door, got out to see where
he was — and was struck by a train. It knocked his glasses off, threw him up in the air,
and knocked both of his work boots off. The train was moving slowly, or he would’ve
been killed. Kenny somehow made it back to the plant, barefoot and bleeding from
deep gashes in his back and his face. He spent two weeks at the hospital, then went
back to work.
One day, Kenny was in rendering and saw a worker about to stick his head into a prebreaker machine, a device that uses hundreds of small hammers to pulverize gristle and
bone into a fine powder. The worker had just turned the machine off, but Kenny knew
the hammers inside were still spinning. It takes fifteen minutes for the machine to shut
down completely. Kenny yelled, “Stop!” but the worker didn’t hear him. And so Kenny
ran across the room, grabbed the man by the seat of his pants, and pulled him away
from the machine an instant before it would have pulverized him. To honor this act of
bravery, Monfort gave Kenny an award for “Outstanding Achievement in CONCERN FOR
FELLOW WORKERS.” The award was a paper certificate, signed by his supervisor and the
plant safety manager.
Kenny later broke his leg stepping into a hole in the slaughterhouse’s concrete floor. On
another occasion he shattered an ankle, an injury that required surgery and the insertion
of five steel pins. Now Kenny had to wear a metal brace on one leg in order to walk, an
elaborate, spring-loaded brace that cost $2,000. Standing for long periods caused him
great pain. He was given a job recycling old knives at the plant. Despite his many injuries,
the job required him to climb up and down three flights of narrow stairs carrying garbage
bags filled with knives. In December of 1995 Kenny felt a sharp pain in his chest while
lifting some boxes. He thought it was a heart attack. His union steward took him to see
the nurse, who said it was just a pulled muscle and sent Kenny home. He was indeed
having a massive heart attack. A friend rushed Kenny to a nearby hospital. A stent was
inserted in his heart, and the doctors told Kenny that he was lucky to be alive.
While Kenny Dobbins was recuperating, Monfort fired him. Despite the fact that Kenny
had been with the company for almost sixteen years, despite the fact that he was first in
seniority at the Greeley plant, that he’d cleaned blood tanks with his bare hands, fought
the union, years, despite the fact that he was first in seniority at the Greeley plant, that
he’d cleaned blood tanks with his bare hands, fought the union, done whatever the
company had asked him to do, suffered injuries that would’ve killed weaker men,
nobody from Monfort called him with the news. Nobody even bothered to write him.
Kenny learned that he’d been fired when his payments to the company health
insurance plan kept being returned by the post office. He called Monfort repeatedly to
find out what was going on, and a sympathetic clerk in the claims office finally told
Kenny that the checks were being returned because he was no longer a Monfort
employee. When I asked company spokesmen to comment on the accuracy of Kenny’s
story, they would neither confirm nor deny any of the details.
Today Kenny is in poor health. His heart is permanently damaged. His immune system
seems shot. His back hurts, his ankle hurts, and every so often he coughs up blood. He is
unable to work at any job. His wife, Clara — who’s half-Latina and half-Cheyenne, and
looks like a younger sister of Cher’s — was working as a nursing home attendant when
51
Kenny had the heart attack. Amid the stress of his illness, she developed a serious kidney
ailment. She is unemployed and recovering from a kidney transplant.
As I sat in the living room of their Greeley home, its walls decorated with paintings of
wolves, Denver Broncos memorabilia, and an American flag, Kenny and Clara told me
about their financial condition. After almost sixteen years on the job, Kenny did not get
any pension from Monfort. The company challenged his workers’ comp claim and finally
agreed — three years after the initial filing — to pay him a settlement of $35,000. Fifteen
percent of that money went to Kenny’s lawyer, and the rest is long gone. Some months
Kenny has to hock things to get money for Clara’s medicine. They have two teenage
children and live on Social Security payments. Kenny’s health insurance, which costs
more than $600 a month, is about to run out. His anger at Monfort, his feelings of
betrayal, are of truly biblical proportions.
“They used me to the point where I had no body parts left to give,” Kenny said, struggling
to maintain his composure. “Then they just tossed me into the trash can.” Once strong
and powerfully built, he now walks with difficulty, tires easily, and feels useless, as though
his life were over. He is forty-six years old.
52
I Was a Warehouse Wage Slave
By Mac McClelland (From Mother Jones)
"Don't take anything that happens to you there personally," the woman at the local
chamber of commerce says when I tell her that tomorrow I start working at
Amalgamated Product Giant Shipping Worldwide Inc. She winks at me. I stare at her for
a second.
"What?" I ask. "Why, is somebody going to be mean to me or something?"
She smiles. "Oh, yeah." This town somewhere west of the Mississippi is not big; everyone
knows someone or is someone who's worked for Amalgamated. "But look at it from their
perspective. They need you to work as fast as possible to push out as much as they can
as fast as they can. So they're gonna give you goals, and then you know what? If you
make those goals, they're gonna increase the goals. But they'll be yelling at you all the
time. It's like the military. They have to break you down so they can turn you into what
they want you to be. So they're going to tell you, 'You're not good enough, you're not
good enough, you're not good enough,' to make you work harder. Don't say, 'This is the
best I can do.' Say, 'I'll try,' even if you know you can't do it. Because if you say, 'This is the
best I can do,' they'll let you go. They hire and fire constantly, every day. You'll see
people dropping all around you. But don't take it personally and break down or start
crying when they yell at you."
Several months prior, I'd reported on an Ohio warehouse where workers shipped
products for online retailers under conditions that were surprisingly demoralizing and
dehumanizing, even to someone who's spent a lot of time working in warehouses, which I
have. And then my editors sat me down. "We want you to go work for Amalgamated
Product Giant Shipping Worldwide Inc.," they said. I'd have to give my real name and job
history when I applied, and I couldn't lie if asked for any specifics. (I wasn't.) But I'd
smudge identifying details of people and the company itself. Anyway, to do otherwise
might give people the impression that these conditions apply only to one warehouse or
one company. Which they don't.
So I fretted about whether I'd have to abort the application process, like if someone
asked me why I wanted the job. But no one did. And though I was kind of excited to trot
out my warehouse experience, mainly all I needed to get hired was to confirm 20 or 30
times that I had not been to prison.
The application process took place at a staffing office in a run-down city, the kind where
there are boarded-up businesses and broken windows downtown and billboards
advertising things like "Foreclosure Fridays!" at a local law firm. Six or seven other people
apply for jobs along with me. We answer questions at computers grouped in several
stations. Have I ever been to prison? the system asks. No? Well, but have I ever been to
prison for assault? Burglary? A felony? A misdemeanor? Raping someone? Murdering
anybody? Am I sure? There's no point in lying, the computer warns me, because criminalbackground checks are run on employees. Additionally, I have to confirm at the next
computer station that I can read, by taking a multiple-choice test in which I'm given
pictures of several album covers, including Michael Jackson's Thriller, and asked what the
name of the Michael Jackson album is. At yet another set of computers I'm asked about
my work history and character. How do I feel about dangerous activities? Would I say I'm
53
not really into them? Or really into them?
In the center of the room, a video plays loudly and continuously on a big screen. Even
more than you are hurting the company, a voice-over intones as animated people do
things like accidentally oversleep, you are hurting yourself when you are late because
you will be penalized on a point system, and when you get too many points, you're
fired—unless you're late at any point during your first week, in which case you are
instantly fired. Also because when you're late or sick you miss the opportunity to maximize
your overtime pay. And working more than eight hours is mandatory. Stretching is also
mandatory, since you will either be standing still at a conveyor line for most of your
minimum 10-hour shift or walking on concrete or metal stairs. And be careful, because
you could seriously hurt yourself. And watch out, because some of your coworkers will be
the kind of monsters who will file false workers' comp claims. If you know of someone
doing this and you tell on him and he gets convicted, you will be rewarded with $500.
The computers screening us for suitability to pack boxes or paste labels belong to a
temporary-staffing agency. The stuff we order from big online retailers lives in large
warehouses, owned and operated either by the retailers themselves or by third-party
logistics contractors, a.k.a. 3PLs. These companies often fulfill orders for more than one
retailer out of a single warehouse. America's largest 3PL, Exel, has 86 million square feet of
warehouse in North America; it's a subsidiary of Deutsche Post DHL, which is cute
because Deutsche Post is the German post office, which was privatized in the 1990s and
bought DHL in 2002, becoming one of the world's biggest corporate employers. The $31
billion "value-added warehousing and distribution" sector of 3PLs is just a fraction of what
large 3PLs' parent companies pull in. UPS's logistics division, for example, pulls in more
than a half a billion, but it feeds billions of dollars of business to UPS Inc.
"Leave your pride and your personal life at the door," the lady at the chamber of commerce says, if I want to last
as an online warehouse worker.
Anyhow, regardless of whether the retailer itself or a 3PL contractor houses and processes
the stuff you buy, the actual stuff is often handled by people working for yet another
company—a temporary-staffing agency. The agency to which I apply is hiring 4,000
drones for this single Amalgamated warehouse between October and December. Four
thousand. Before leaving the staffing office, I'm one of them.
I'm assigned a schedule of Sunday through Thursday, 7 a.m. to 5:30 p.m. When additional
overtime is necessary, which it will be soon (Christmas!), I should expect to leave at 7 or
7:30 p.m. instead. Eight days after applying, i.e., after my drug test has cleared, I walk
through a small, desolate town nearly an hour outside the city where I was hired. This is
where the warehouse is, way out here, a long commute for many of my coworkers. I
wander off the main road and into the chamber of commerce to kill some afternoon
time—though not too much since my first day starts at 5 a.m.—but I end up getting useful
job advice.
"Well, what if I do start crying?" I ask the woman who warns me to keep it together no
matter how awfully I'm treated. "Are they really going to fire me for that?"
"Yes," she says. "There's 16 other people who want your job. Why would they keep a
person who gets emotional, especially in this economy?"
54
Still, she advises, regardless of how much they push me, don't work so hard that I injure
myself. I'm young. I have a long life ahead of me. It's not worth it to do permanent
physical damage, she says, which, considering that I got hired at elevensomething
dollars an hour, is a bit of an understatement.
As the sun gets lower in the curt November sky, I thank the woman for her help. When I
start toward the door, she repeats her "No. 1 rule of survival" one more time.
"Leave your pride and your personal life at the door." If there's any way I'm going to last,
she says, tomorrow I have to start pretending like I don't have either.
Though it's inconvenient for most employees, the rural location of the Amalgamated
Product Giant Shipping Worldwide Inc. warehouse isn't an accident. The town is bisected
by a primary interstate, close to a busy airport, serviced by several major highways.
There's a lot of rail out here. The town became a station stop on the way to more
important places a hundred years ago, and it now feeds part of the massive transit
networks used to get consumers anywhere goods from everywhere. Every now and then,
a long line of railcars rolls past my hotel and gives my room a good shake. I don't ever
get a good look at them, because it's dark outside when I go to work, and dark again
when I get back.
We are surrounded by signs that state our productivity goals. Other signs proclaim that a good customer
experience, to which our goal-meeting is essential, is the key to growth, and growth is the key to lower prices,
which leads to a better customer experience. There is no room for inefficiencies.
Inside Amalgamated, an employee's first day is training day. Though we're not paid to be
here until 6, we have been informed that we need to arrive at 5. If we don't show up in
time to stand around while they sort out who we are and where they've put our ID
badges, we could miss the beginning of training, which would mean termination. "I was
up half the night because I was so afraid I was going to be late," a woman in her 60s tells
me. I was, too. A minute's tardiness after the first week earns us 0.5 penalty points, an
hour's tardiness is worth 1 point, and an absence 1.5; 6 is the number that equals
"release." But during the first week even a minute's tardiness gets us fired. When we get
lined up so we can be counted a third or fourth time, the woman conducting the roll call
recognizes the last name of a young trainee. "Does your dad work here? Or uncle?" she
asks. "Grandpa," he says, as another supervisor snaps at the same time, sounding not
mean but very stressed out, "We gotta get goin' here."
The culture is intense, an Amalgamated higher-up acknowledges at the beginning of our
training. He's speaking to us from a video, one of several videos—about company
policies, sexual harassment, etc.—that we watch while we try to keep our eyes open. We
don't want to be so intense, the higher-up says. But our customers demand it. We are
surrounded by signs that state our productivity goals. Other signs proclaim that a good
customer experience, to which our goal-meeting is essential, is the key to growth, and
growth is the key to lower prices, which leads to a better customer experience. There is
no room for inefficiencies. The gal conducting our training reminds us again that we
cannot miss any days our first week. There are NO exceptions to this policy. She says to
take Brian, for example, who's here with us in training today. Brian already went through
this training, but then during his first week his lady had a baby, so he missed a day and he
had to be fired. Having to start the application process over could cost a brand-new
dad like Brian a couple of weeks' worth of work and pay. Okay? Everybody turn around
55
and look at Brian. Welcome back, Brian. Don't end up like Brian.
Soon, we move on to practical training. Like all workplaces with automated and heavy
machinery, this one contains plenty of ways to get hurt, and they are enumerated. There
are transition points in the warehouse floor where the footing is uneven, and people trip
and sprain ankles. Give forklifts that are raised up several stories to access products a
wide berth: "If a pallet falls on you, you won't be working with us anymore." Watch your
fingers around the conveyor belts that run waist-high throughout the entire facility.
People lose fingers. Or parts of fingers. And about once a year, they tell us, someone in
an Amalgamated warehouse gets caught by the hair, and when a conveyor belt
catches you by the hair, it doesn't just take your hair with it. It rips out a piece of scalp as
well.
If the primary message of one-half of our practical training is Be Careful, the takeaway of
the other half is Move As Fast As Humanly Possible. Or superhumanly possible. I have
been hired as a picker, which means my job is to find, scan, place in a plastic tote, and
send away via conveyor whatever item within the multiple stories of this several-hundredthousand-square-foot warehouse my scanner tells me to. We are broken into groups and
taught how to read the scanner to find the object among some practice shelves. Then
we immediately move on to practicing doing it faster, racing each other to fill the orders
our scanners dictate, then racing each other to put all the items back.
"Hurry up," a trainer encourages me when he sees me pulling ahead of the others, "and
you can put the other items back!" I roll my eyes that my reward for doing a good job is
that I get to do more work, but he's got my number: I am exactly the kind of freak this sort
of motivation appeals to. I win, and set myself on my prize of the bonus errand.
That afternoon, we are turned loose in the warehouse, scanners in hand. And that's when
I realize that for whatever relative youth and regular exercise and overachievement
complexes I have brought to this job, I will never be able to keep up with the goals I've
been given.
The place is immense. Cold, cavernous. Silent, despite thousands of people quietly doing
their picking, or standing along the conveyors quietly packing or box-taping, nothing
noisy but the occasional whir of a passing forklift. My scanner tells me in what exact
section—there are nine merchandise sections, so sprawling that there's a map attached
to my ID badge—of vast shelving systems the item I'm supposed to find resides. It also tells
me how many seconds it thinks I should take to get there. Dallas sector, section yellow,
row H34, bin 22, level D: wearable blanket. Battery-operated flour sifter. Twenty seconds. I
count how many steps it takes me to speed-walk to my destination: 20. At 5-foot-9, I've
got a decently long stride, and I only cover the 20 steps and locate the exact shelving
unit in the allotted time if I don't hesitate for one second or get lost or take a drink of
water before heading in the right direction as fast as I can walk or even occasionally jog.
Olive-oil mister. Male libido enhancement pills. Rifle strap. Who the fuck buys their paper
towels off the internet? Fairy calendar. Neoprene lunch bag. Often as not, I miss my time
target.
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TOP 60
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57
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• Abercrombie & Fitch
• American Eagle Outfitters
• Follett Higher Education group
• US Auto Parts Network
• Blue Nile
Source: Internet Retailer Top 500 Guide
Plenty of things can hurt my goals. The programs for our scanners are designed with the
assumption that we disposable employees don't know what we're doing. Find a Rob
Zombie Voodoo Doll in the blue section of the Rockies sector in the third bin of the Alevel in row Z42, my scanner tells me. But if I punch into my scanner that it's not there, I
have to prove it by scanning every single other item in the bin, though I swear on my life
there's no Rob Zombie Voodoo Doll in this pile of 30 individually wrapped and bar-coded
batteries that take me quite a while to beep one by one. It could be five minutes before
I can move on to, and make it to, and find, my next item. That lapse is supposed to be
mere seconds.
This week, we newbies need to make 75 percent of our total picking-volume targets. If
we don't, we get "counseled." If the people in here who've been around longer than a
few weeks don't make their 100 percent, they get counseled. Why aren't you making
your targets? the supervisors will ask. You really need to make your targets.
More than 15 percent of pickers, packers, movers, and unloaders are temps. They make $3 less an hour on
average than permanent workers. And they can be "temporary" for years.
From the temp agency, Amalgamated has ordered the exact number of humans it
should take to fill this week's orders if we work at top capacity. Lots of retailers use
temporary help in peak season, and online ones are no exception. But lots of
warehousing and distribution centers like this also use temps year-round. The Bureau of
Labor Statistics found that more than 15 percent of pickers, packers, movers, and
unloaders are temps. They make $3 less an hour on average than permanent workers.
And they can be "temporary" for years. There are so many temps in this warehouse that
the staffing agency has its own office here. Industry consultants describe the tempstaffing business as "very, very busy." "On fire." Maximizing profits means making sure no
employee has a slow day, means having only as many employees as are necessary to
get the job done, the number of which can be determined and ordered from a huge
pool of on-demand labor literally by the day. Often, temp workers have to call in before
shifts to see if they'll get work. Sometimes, they're paid piece rate according to the
number of units they fill or unload or move. Always, they can be let go in an instant, and
replaced just as quickly.
Everyone in here is hustling. At the announcement to take one of our two 15-minute
breaks, we hustle even harder. We pickers close out the totes we're currently filling and
send them away on the conveyor belt, then make our way as fast as we can with the
rest of the masses across the long haul of concrete between wherever we are and the
break room, but not before passing through metal detectors, for which there is a line—
we're required to be screened on our way out, though not on our way in; apparently the
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concern is that we're sneaking Xbox 360s up under our shirts, not bringing in weapons. If
we don't set off the metal detector and have to be taken aside and searched, we can
run into the break room and try to find a seat among the rows and rows and long-ass
rows of tables. We lose more time if we want to pee—and I do want to pee, and when
amid the panic about the time constraints it occurs to me that I don't have my period I
toss a fist victoriously into the air—between the actual peeing and the waiting in line to
pee in the nearest one of the two bathrooms, which has eight stalls in the ladies' and I'm
not sure how many in the men's and serves thousands of people a day. Once I pare this
process down as much as possible, by stringing a necktie through my belt loops because
I can't find a metal-less replacement for my belt at the local Walmart—and if my
underwear or butt-crack slips out, I've been warned, I can get penalized—and by
leaving my car keys in the break room after a manager helps me find an admittedly "still
risky" hiding place for them because we have no lockers and "things get stolen out of
here all the time," I get myself up to seven minutes' worth of break time to inhale as many
high-fat and -protein snacks as I can. People who work at Amalgamated are always
working this fast. Right now, because it's almost Black Friday, there are just more of us
doing it.
Then as quickly as we've come, we all run back. At the end of the 15 minutes, we're
supposed to be back at whichever far-flung corner of the warehouse we came from,
scanners in hand, working. We run to grab the wheeled carts we put the totes on. We run
past each other and if we do say something, we say it as we keep moving. "How's the
job market?" a supervisor says, laughing, as several of us newbies run by. "Just kidding!"
Ha ha! "I know why you guys are here. That's why I'm here, too!" At another near collision
between employees, one wants to know how complaining about not being able to get
time off went and the other spits that he was told he was lucky to have a job. This is no
way to have a conversation, but at least conversations are not forbidden, as they were
in the Ohio warehouse I reported on—where I saw a guy get fired for talking, specifically
for asking another employee, "Where are you from?" So I'm allowed the extravagance of
smiling at a guy who is always so unhappy and saying, "How's it goin'?" And he can
respond, "Terrible," as I'm running to the big industrial cage-lift that takes our carts up to
the second or third floors, which involves walking under a big metal bar gating the front
of it, and which I should really take my time around. Within the last month, three different
people have needed stitches in the head after being clocked by these big metal bars,
so it's dangerous. Especially the lift in the Dallas sector, whose bar has been installed
wrong, so it is extra prone to falling, they tell us. Be careful. Seriously, though. We really
need to meet our goals here.
It's a welcome distraction from the pain to imagine all these sex toys being taken out from under a tree and
unwrapped. Merry Christmas. I got you this giant black cock you wanted.
Amalgamated has estimated that we pickers speed-walk an average of 12 miles a day
on cold concrete, and the twinge in my legs blurs into the heavy soreness in my feet that
complements the pinch in my hips when I crouch to the floor—the pickers' shelving runs
from the floor to seven feet high or so—to retrieve an iPad protective case. iPad antiglare protector. iPad one-hand grip-holder device. Thing that looks like a landline phone
handset that plugs into your iPad so you can pretend that rather than talking via iPad
you are talking on a phone. And dildos. Really, a staggering number of dildos. At breaks,
some of my coworkers complain that they have to handle so many dildos. But it's one of
the few joys of my day. I've started cringing every time my scanner shows a code that
means the item I need to pick is on the ground, which, in the course of a 10.5-hour shift—
much less the mandatory 12-hour shifts everyone is slated to start working next week—is
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literally hundreds of times a day. "How has OSHA signed off on this?" I've taken to
muttering to myself. "Has OSHA signed off on this?" ("The thing about ergonomics," OSHA
says when I call them later to ask, "is that OSHA doesn't have a standard. Best practices.
But no laws.") So it's a welcome distraction, really, to imagine all these sex toys being
taken out from under a tree and unwrapped. Merry Christmas. I got you this giant black
cock you wanted.
At lunch, the most common question, aside from "Which offensive dick-shaped product
did you handle the most of today?" is "Why are you here?" like in prison. A guy in his mid20s says he's from Chicago, came to this state for a full-time job in the city an hour away
from here because "Chicago's going down." His other job doesn't pay especially well, so
he's here—pulling 10.5-hour shifts and commuting two hours a day—anytime he's not
there. One guy says he's a writer; he applies for grants in his time off from the warehouse.
A middle-aged lady near me used to be a bookkeeper. She's a peak-season hire,
worked here last year during Christmas, too. "What do you do the rest of the year?" I ask.
"Collect unemployment!" she says, and laughs the sad laugh you laugh when you're
saying something really unfunny. All around us in the break room, mothers frantically call
home. "Hi, baby!" you can hear them say; coos to children echo around the walls the
moment lunch begins. It's brave of these women to keep their phones in the break room,
where theft is so high—they can't keep them in their cars if they want to use them during
the day, because we aren't supposed to leave the premises without permission, and they
can't take them onto the warehouse floor, because "nothing but the clothes on your
backs" is allowed on the warehouse floor (anything on your person that Amalgamated
sells can be confiscated—"And what does Amalgamated sell?" they asked us in training.
"Everything!"). I suppose that if I were responsible for a child, I would have no choice but
to risk leaving my phone in here, too. But the mothers make it quick. "How are you
doing?" "Is everything okay?" "Did you eat something?" "I love you!" and then they're off
the phone and eating as fast as the rest of us. Lunch is 29 minutes and 59 seconds—
we've been reminded of this: "Lunch is not 30 minutes and 1 second"—that's a penaltypoint-earning offense—and that includes the time to get through the metal detectors
and use the disgustingly overcrowded bathroom—the suggestion board hosts several
pleas that someone do something about that smell—and time to stand in line to clock
out and back in. So we chew quickly, and are often still chewing as we run back to our
stations.
The days blend into each other. But it's near the end of my third day that I get written up.
I sent two of some product down the conveyor line when my scanner was only asking for
one; the product was boxed in twos, so I should've opened the box and separated
them, but I didn't notice because I was in a hurry. With an hour left in the day, I've
already picked 800 items. Despite moving fast enough to get sloppy, my scanner tells me
that means I'm fulfilling only 52 percent of my goal. A supervisor who is a genuinely nice
person comes by with a clipboard listing my numbers. Like the rest of the supervisors, she
tries to create a friendly work environment and doesn't want to enforce the policies that
make this job so unpleasant. But her hands are tied. She needs this job, too, so she has no
choice but to tell me something I have never been told in 19 years of school or at any of
some dozen workplaces."You're doing really bad," she says.
I'll admit that I did start crying a little. Not at work, thankfully, since that's evidently
frowned upon, but later, when I explained to someone over Skype that it hurts, oh, how
my body hurts after failing to make my goals despite speed-walking or flat-out jogging
and pausing every 20 or 30 seconds to reach on my tiptoes or bend or drop to the floor
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for 10.5 hours, and isn't it awful that they fired Brian because he had a baby, and, in fact,
when I was hired I signed off on something acknowledging that anyone who leaves
without at least a week's notice—whether because they're a journalist who will just walk
off or because they miss a day for having a baby and are terminated—has their hours
paid out not at their hired rate but at the legal minimum. Which in this state, like in lots of
states, is about $7 an hour. Thank God that I (unlike Brian, probably) didn't need to pay
for opting into Amalgamated's "limited" health insurance program. Because in my 10.5hour day I'll make about $60 after taxes.
"This is America?" my Skype pal asks, because often I'm abroad.
With an hour left in the day, I've already picked 800 items. Despite moving fast enough to get sloppy, my
scanner tells me that means I'm fulfilling only 52 percent of my goal.
Indeed, and I'm working for a gigantic, immensely profitable company. Or for the staffing
company that works for that company, anyway. Which is a nice arrangement, because
temporary-staffing agencies keep the stink of unacceptable labor conditions off the
companies whose names you know. When temps working at a Walmart warehouse sued
for not getting paid for all their hours, and for then getting sent home without pay for
complaining, Walmart—not technically their employer—wasn't named as a defendant.
(Though Amazon has been named in a similar suit.) Temporary staffers aren't legally
entitled to decent health care because they are just short-term "contractors" no matter
how long they keep the same job. They aren't entitled to raises, either, and they don't get
vacation and they'd have a hell of a time unionizing and they don't have the privilege of
knowing if they'll have work on a particular day or for how long they'll have a job. And
that is how you slash prices and deliver products superfast and offer free shipping and still
post profits in the millions or billions.
"This really doesn't have to be this awful," I shake my head over Skype. But it is. And this
job is just about the only game in town, like it is in lots of towns, and eventually will be in
more towns, with US internet retail sales projected to grow 10 percent every year to $279
billion in 2015 and with Amazon, the largest of the online retailers, seeing revenues rise 30
to 40 percent year after year and already having 69 giant warehouses, 17 of which
came online in 2011 alone. So butch up, Sally.
"You look way too happy," an Amalgamated supervisor says to me. He has appeared
next to me as I work, and in the silence of the vast warehouse, his presence catches me
by surprise. His comment, even more so.
"Really?" I ask.
I don't really feel happy. By the fourth morning that I drag myself out of bed long before
dawn, my self-pity has turned into actual concern. There's a screaming pain running
across the back of my shoulders. "You need to take 800 milligrams of Advil a day," a
woman in her late 50s or early 60s advised me when we all congregated in the break
room before work. When I arrived, I stashed my lunch on a bottom ledge of the cheap
metal shelving lining the break room walls, then hesitated before walking away. I cursed
myself. I forgot something in the bag, but there was no way to get at it without crouching
or bending over, and any extra times of doing that today were times I couldn't really
afford. The unhappy-looking guy I always make a point of smiling at told me, as we were
hustling to our stations, that this is actually the second time he's worked here: A few
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weeks back he missed some time for doctors' appointments when his arthritis flared up,
and though he had notes for the absences, he was fired; he had to start the application
process over again, which cost him an extra week and a half of work. "Zoom zoom! Pick
it up! Pickers' pace, guys!" we were prodded this morning. Since we already felt like we
were moving pretty fast, I'm quite dispirited, in fact.
"Really?" I ask.
"Well," the supervisor qualifies. "Just everybody else is usually really sad or mad by the time
they've been working here this long."
It's my 28th hour as an employee.
I probably look happier than I should because I have the extreme luxury of not giving a
shit about keeping this job. Nevertheless, I'm tearing around my assigned sector hard
enough to keep myself consistently light-headed and a little out of breath. I'm working in
books today. "Oh," I smiled to myself when I reached the paper-packed shelves. I love
being around books.
A hot spark shoots between my hand and the metal shelving, striking enough to make my body learn to fear it.
Picking books for Amalgamated has a disadvantage over picking dildos or baby food or
Barbies, however, in that the shelving numbers don't always line up. When my scanner
tells me the book I need is on the lowest level in section 28 of a row, section 28 of the
eye-level shelf of that row may or may not line up with section 28 of the lowest level. So
when I spot eye-level section 28 and squat or kneel on the floor, the section 28 I'm
looking for might be five feet to my right or left. Which means I have to stand up and
crouch back down again to get there, greatly increasing the number of times I need to
stand and crouch/kneel in a day. Or I can crawl. Usually, I crawl. A coworker is choosing
the crouch/kneel option. "This gets so tiring after a while," he says when we pass each
other. He's 20. It's 9:07 a.m.
There are other disadvantages to working in books. In the summer, it's the heat. Lots of
the volumes are stored on the second and third floors of this immense cement box; the
job descriptions we had to sign off on acknowledged that temperatures can be as low
as 60 and higher than 95 degrees, and higher floors tend to be hotter. "They had to get
fans because in the summer people were dying in here," one of the supervisors tells us.
The fans still blow now even though I'm wearing five shirts. "If you think it's cold in here,"
one of my coworkers told me when she saw me rubbing my arms for warmth one
morning, "just hope we don't have a fire drill." They evacuated everyone for one recently,
and lots of the fast-moving employees had stripped down to T-shirts. They stood outside,
masses of them, shivering for an hour as snow fell on their bare arms.
In the books sector, in the cold, in the winter dryness, made worse by the fans and all the
paper, I jet across the floor in my rubber-soled Adidas, pant legs whooshing against each
other, 30 seconds according to my scanner to take 35 steps to get to the right section
and row and bin and level and reach for Diary of a Wimpy Kid and "FUCK!" A hot spark
shoots between my hand and the metal shelving. It's not the light static-electric prick I
would terrorize my sister with when we got bored in carpeted department stores, but a
solid shock, striking enough to make my body learn to fear it. I start inadvertently
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hesitating every time I approach my target. One of my coworkers races up to a shelving
unit and leans in with the top of his body first; his head touches the metal, and the shock
knocks him back. "Be careful of your head," he says to me. In the first two hours of my
day, I pick 300 items. The majority of them zap me painfully.
"Please tell me you have suggestions for dealing with the static electricity," I say to a
person in charge when the morning break comes. This conversation is going to cost me a
couple of my precious few minutes to eat/drink/pee, but I've started to get paranoid
that maybe it's not good for my body to exchange an electric charge with metal several
hundred times in one day.
"You'll feel carpal tunnel start to set in," one of the supervisors told me, "so you'll want to change hands."
"Oh, are you workin' in books?"
"Yeah."
"No. Sorry." She means this. I feel bad for the supervisors who are trying their damnedest
to help us succeed and not be miserable. "They've done everything they can"—"they"
are not aware, it would appear, that anti-static coating and matting exist—"to ground
things up there but there's nothing you can do."
I produce a deep frown. But even if she did have suggestions, I probably wouldn't have
time to implement them. One suggestion for minimizing work-related pain and strain is to
get a stepladder to retrieve any items on shelves above your head rather than getting
up on your toes and overreaching. But grabbing one of the stepladders stashed few and
far between among the rows of merchandise takes time. Another is to alternate the
hand you use to hold and wield your cumbersome scanner. "You'll feel carpal tunnel start
to set in," one of the supervisors told me, "so you'll want to change hands." But that, too,
he admitted, costs time, since you have to hit the bar code at just the right angle for it to
scan, and your dominant hand is way more likely to nail it the first time. Time is not a thing
I have to spare. I'm still only at 57 percent of my goal. It's been 10 years since I was a
mover and packer for a moving company, and only slightly less since I worked
ridiculously long hours as a waitress and housecleaner. My back and knees were younger
then, but I'm only 31 and feel pretty confident that if I were doing those jobs again I'd still
wake up with soreness like a person who'd worked out too much, not the soreness of a
person whose body was staging a revolt. I can break into goal-meeting suicide pace for
short bouts, sure, but I can't keep it up for 10.5 hours.
"Do not say that," one of the workampers tells me at break. Workampers are people who
drive RVs around the country, from temporary job to temporary job, docking in trailer
camps. "We're retired but we can't…" another explains to me about himself and his wife,
shrugging, "make it. And there's no jobs, so we go where the jobs are."
Amalgamated advertises positions on websites workampers frequent. In this warehouse
alone, there are hundreds of them.
"Never say that you can't do it," the first workamper emphasizes. "When they ask you why
you aren't reaching your goals—"
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"Say, 'It's because they're totally unreasonable'?" I suggest.
"These decisions are made at a business level and are based on cost," an industry analyst says. "I never, ever
thought about what they're like and how they treat people. Fulfillment centers want to keep clients blissfully
ignorant of their conditions."
"Say you'll do better, even if you know you can't," she continues, ignoring me. "Say you'll
try harder, even if the truth is that you're trying your absolute hardest right now, no matter
how many times they tell you you're not doing good enough."
There are people who make the goals. One of the trainers does. She works here all year,
not just during Christmas. "I hated picking for the first month," she told me sympathetically
the other day. "Then you just get used to it." She's one of many hardcore workers here, a
labor pool studded with dedicated and solid employees. One of the permanent
employees has tried to encourage me by explaining that he always makes his goals, and
sometimes makes 120 percent of them. When I ask him if that isn't totally exhausting, he
says, "Oh yeah. You're gonna be crying for your mommy when today's over." When I ask
him if there's any sort of incentive for his overperformance, if he's rewarded in any way,
he says occasionally Amalgamated enters him in drawings for company gift cards. For
$15 or $20. He shrugs when he admits the size of the bonus. "These days you need it."
Anyway, he says, he thinks it's important to have a good attitude and try to do a good
job. Even some of the employees who are total failures are still trying really hard. "I heard
you're doing good," one of the ladies in my training group says to me. Her eyebrows are
heavy with stress. I am still hitting less than 60 percent of my target. Still, that's better than
she's doing. "Congratulations," she says, and smiles sadly.
We will be fired if we say we just can't or won't get better, the workamper tells me. But so
long as I resign myself to hearing how inadequate I am on a regular basis, I can keep this
job. "Do you think this job has to be this terrible?" I ask the workamper.
"Oh, no," she says, and makes a face at me like I've asked a stupid question, which I
have. As if Amalgamated couldn't bear to lose a fraction of a percent of profits by
employing a few more than the absolute minimum of bodies they have to, or by storing
the merchandise at halfway ergonomic heights and angles. But that would cost space,
and space costs money, and money is not a thing customers could possibly be
expected to hand over for this service without huffily taking their business elsewhere.
Charging for shipping does cause high abandonment rates of online orders, though it's
not clear whether people wouldn't pay a few bucks for shipping, or a bit more for the
products, if they were guaranteed that no low-income workers would be tortured or
exploited in the handling of their purchases.
"The first step is awareness," an e-commerce specialist will tell me later. There have been
trickles of information leaking out of the Internet Order Fulfillment Industrial Complex: an
investigation by the Allentown, Pennsylvania, Morning Call in which Amazon workers
complained of fainting in stifling heat, being disciplined for getting heat exhaustion, and
otherwise being "treated like a piece of crap"; a workampers' blog picked up by
Gizmodo; a Huffington Post exposé about the lasting physical damage and wild
economic instability temporary warehouse staffers suffer. And workers have filed lawsuits
against online retailers, their logistics companies, and their temp agencies over off-theclock work and other compensation issues, as well as at least one that details working
conditions that are all too similar. (That case has been dismissed but is on appeal.) Still,
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most people really don't know how most internet goods get to them. The e-commerce
specialist didn't even know, and she was in charge of choosing the 3PL for her midsize
online-retail company. "These decisions are made at a business level and are based on
cost," she says. "I never, ever thought about what they're like and how they treat people.
Fulfillment centers want to keep clients blissfully ignorant of their conditions." If you called
major clothing retailers, she ventured, and asked them "what it was like at the warehouse
that ships their sweaters, no one at company headquarters would have any fucking
clue."
Further, she said, now that I mentioned it, she has no idea how to go about getting any
information on the conditions at the 3PL she herself hired. Nor how to find a responsible
one. "A standard has to be created. Like fair trade or organic certification, where social
good is built into the cost. There is a segment of the population"—like the consumers of
her company's higher-end product, she felt—"that cares and will pay for it."
There's no time off on Election Day. "What if I want to vote?" I ask a supervisor. "I think you should!" he says. "But if I
leave I'll get fired," I say. To which he makes a sad face before saying, "Yeah."
If they are aware how inhumane the reality is. But awareness has a long way to go, and
logistics doesn't just mean online retail; food packagers and processors, medical
suppliers, and factories use mega-3PLs as well. And a whole lot of other industries—hotels,
call centers—take advantage of the price controls and plausible deniability that
temporary staffing offers.
"Maybe awareness will lead to better working conditions," says Vinod Singhal, a professor
of operations management at Georgia Tech. "But…" Given the state of the economy, he
isn't optimistic.
This is the kind of resignation many of my coworkers have been forced to accept. At the
end of break, the workamper and I are starting to fast-walk back to our stations. A guy
who's been listening to our conversation butts in. "They can take you for everything
you've got," he says. "They know it's your last resort."
At today's pickers' meeting, we are reminded that customers are waiting. We cannot
move at a "comfortable pace," because if we are comfortable, we will never make our
numbers, and customers are not willing to wait. And it's Christmastime. We got 2.7 million
orders this week. People need—need—these items and they need them right now. So
even if you've worked here long enough to be granted time off, you are not allowed to
use it until the holidays are over. (And also forget about Election Day, which is today.
"What if I want to vote?" I ask a supervisor. "I think you should!" he says. "But if I leave I'll get
fired," I say. To which he makes a sad face before saying, "Yeah.") No time off includes
those of you who are scheduled to work Thanksgiving. There are two Amalgamatedcatered Thanksgiving dinners offered to employees next week, but you can only go to
one of them. If you attend one, your employee badge will be branded with a
nonremovable sticker so that you cannot also attempt to eat at the other. Anyway,
good luck, everybody. Everybody back to work. Quickly!
I feel genuinely sorry for any child who ever asks me for anything for Christmas, only to be informed that every
time a "Place Order" button rings, a poor person takes four Advil and gets told they suck at their job.
Speed-walking back to the electro-trauma of the books sector, I wince when I
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unintentionally imagine the types of Christmas lore that will prevail around my future
household. I feel genuinely sorry for any child I might have who ever asks me for anything
for Christmas, only to be informed that every time a "Place Order" button rings, a poor
person takes four Advil and gets told they suck at their job.
I suppose this is what they were talking about in the radio ad I heard on the way to work,
the one that was paid for by a coalition of local businesses, gently begging citizens to
buy from them instead of off the internet and warning about the importance of
supporting local shops. But if my coworker Brian wants to feed his new baby any of these
24-packs of Plum Organics Apple & Carrot baby food I've been picking, he should
probably buy them from Amazon, where they cost only $31.16. In my locally owned
grocery store, that's $47.76 worth of sustenance. Even if he finds the time to get in the car
to go buy it at a brick-and-mortar Target, where it'd be less convenient but cost about
the same as on Amazon, that'd be before sales tax, which physical stores, unlike
Amazon, are legally required to charge to help pay for the roads on which Brian's truck,
and more to the point Amazon's trucks, drive.
Back in books, I take a sharp shock to my right hand when I grab the book the scanner
cramping my left hand demands me to and make some self-righteous promises to myself
about continuing to buy food at my more-expensive grocery store, because I can.
Because I'm not actually a person who makes $7.25 an hour, not anymore, not one of
the 1 in 3 Americans who is now poor or "near poor." For the moment, I'm just playing
one.
"Lucky girl," I whisper to myself at the tail of a deep breath, as soon as fresh winter air hits
my lungs. It's only lunchtime, but I've breached the warehouse doors without permission.
I've picked 500 items this morning, and don't want to get shocked anymore, or hear from
the guy with the clipboard what a total disappointment I am. "Lucky girl, lucky girl, lucky
girl," I repeat on my way to my car. I told the lady from my training group who's so
stressed about her poor performance to tell our supervisor not to look for me—and she
grabbed my arm as I turned to leave, looking even more worried than usual, asking if I
was sure I knew what I was doing. I don't want our supervisor to waste any time; he's got
goals to make, too. He won't miss me, and nobody else will, either. The temp agency is
certainly as full of applicants as it was when I went to ask for a job.
"Just look around in here if you wanna see how bad it is out there," one of the associates
at the temp office said to me, unprompted, when I got hired. It's the first time anyone has
ever tried to comfort me because I got a job, because he knew, and everyone in this
industry that's growing wildfire fast knows, and accepts, that its model by design is mean.
He offered me the same kind of solidarity the workers inside the warehouse try to provide
each other at every break: Why are you here? What happened that you have to let
people treat you like this? "We're all in the same boat," he said, after shaking my hand to
welcome me aboard. "It's a really big boat."
This story ran in the March/April 2012 issue of Mother Jones, under the headline "Shelf
Lives."
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Why I Am Leaving Goldman Sachs
By GREG SMITH, March 14, 2012, NYTimes
TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a
summer intern while at Stanford, then in New York for 10 years, and now in London — I
believe I have worked here long enough to understand the trajectory of its culture, its
people and its identity. And I can honestly say that the environment now is as toxic and
destructive as I have ever seen it.
To put the problem in the simplest terms, the interests of the client continue to be
sidelined in the way the firm operates and thinks about making money. Goldman Sachs
is one of the world’s largest and most important investment banks and it is too integral to
global finance to continue to act this way. The firm has veered so far from the place I
joined right out of college that I can no longer in good conscience say that I identify with
what it stands for.
It might sound surprising to a skeptical public, but culture was always a vital part of
Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and
always doing right by our clients. The culture was the secret sauce that made this place
great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making
money; this alone will not sustain a firm for so long. It had something to do with pride and
belief in the organization. I am sad to say that I look around today and see virtually no
trace of the culture that made me love working for this firm for many years. I no longer
have the pride, or the belief.
But this was not always the case. For more than a decade I recruited and mentored
candidates through our grueling interview process. I was selected as one of 10 people
(out of a firm of more than 30,000) to appear on our recruiting video, which is played on
every college campus we visit around the world. In 2006 I managed the summer intern
program in sales and trading in New York for the 80 college students who made the cut,
out of the thousands who applied.
I knew it was time to leave when I realized I could no longer look students in the eye and
tell them what a great place this was to work.
When the history books are written about Goldman Sachs, they may reflect that the
current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost
hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral
fiber represents the single most serious threat to its long-run survival.
Over the course of my career I have had the privilege of advising two of the largest
hedge funds on the planet, five of the largest asset managers in the United States, and
three of the most prominent sovereign wealth funds in the Middle East and Asia. My
clients have a total asset base of more than a trillion dollars. I have always taken a lot of
pride in advising my clients to do what I believe is right for them, even if it means less
money for the firm. This view is becoming increasingly unpopular at Goldman Sachs.
Another sign that it was time to leave.
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How did we get here? The firm changed the way it thought about leadership. Leadership
used to be about ideas, setting an example and doing the right thing. Today, if you
make enough money for the firm (and are not currently an ax murderer) you will be
promoted into a position of influence.
What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which
is Goldman-speak for persuading your clients to invest in the stocks or other products that
we are trying to get rid of because they are not seen as having a lot of potential profit.
b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and
some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call
me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c)
Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a
three-letter acronym.
Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero
percent. I attend derivatives sales meetings where not one single minute is spent asking
questions about how we can help clients. It’s purely about how we can make the most
possible money off of them. If you were an alien from Mars and sat in on one of these
meetings, you would believe that a client’s success or progress was not part of the
thought process at all.
It makes me ill how callously people talk about ripping their clients off. Over the last 12
months I have seen five different managing directors refer to their own clients as
“muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus,
God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is
eroding. I don’t know of any illegal behavior, but will people push the envelope and
pitch lucrative and complicated products to clients even if they are not the simplest
investments or the ones most directly aligned with the client’s goals? Absolutely. Every
day, in fact.
It astounds me how little senior management gets a basic truth: If clients don’t trust you
they will eventually stop doing business with you. It doesn’t matter how smart you are.
These days, the most common question I get from junior analysts about derivatives is,
“How much money did we make off the client?” It bothers me every time I hear it,
because it is a clear reflection of what they are observing from their leaders about the
way they should behave. Now project 10 years into the future: You don’t have to be a
rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room
hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn
into a model citizen.
When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my
shoelaces. I was taught to be concerned with learning the ropes, finding out what a
derivative was, understanding finance, getting to know our clients and what motivated
them, learning how they defined success and what we could do to help them get there.
My proudest moments in life — getting a full scholarship to go from South Africa to
Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze
medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics
— have all come through hard work, with no shortcuts. Goldman Sachs today has
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become too much about shortcuts and not enough about achievement. It just doesn’t
feel right to me anymore.
I hope this can be a wake-up call to the board of directors. Make the client the focal
point of your business again. Without clients you will not make money. In fact, you will not
exist. Weed out the morally bankrupt people, no matter how much money they make for
the firm. And get the culture right again, so people want to work here for the right
reasons. People who care only about making money will not sustain this firm — or the
trust of its clients — for very much longer.
Greg Smith is resigning today as a Goldman Sachs executive director and head of the
firm’s United States equity derivatives business in Europe, the Middle East and Africa.
On Goldman Executive Greg Smith’s Brave Departure
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By Matt Taibbi (from rollingstone.com)
Wall Street is buzzing this morning about a resignation – a historic one. Greg Smith, the
executive director and head of Goldman Sachs’s United States equity derivatives
business in Europe, the Middle East and Africa, not only decided to quit Goldman, he
decided to do it in the New York Times, eloquently deconstructing the firm’s moral slide in
a lengthy op-ed piece.
The essence of Smith’s piece is devastating. He points to one simple, specific problem in
the company: the fact that Goldman routinely screws its own clients. Anyone familiar
with the report prepared by Senator Carl Levin’s Permanent Subcommittee on
Investigations will recognize the jargon Smith points to in this line, in which he talks about
what one has to do to become a leader in today’s Goldman:
Execute on the firm’s "axes," which is Goldman-speak for persuading your clients to invest
in the stocks or other products that we are trying to get rid of because they are not seen
as having a lot of potential profit.
We heard about "axes" before in the tales about loser mortgage-derivative products like
Timberwolf – that Goldman gave incentives to executives to unload its most toxic crap
on clients. It was one thing to read about it in a Senate report, but here we have it from
one of the firm’s own directors. He goes further, talking about the ways in which
Goldman executives derided their own clients as fools and dupes:
It makes me ill how callously people talk about ripping their clients off. Over the last 12
months I have seen five different managing directors refer to their own clients as
"muppets," sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus,
God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on.
The resignation will have an effect on Goldman’s business. The firm’s share price opened
this morning at 124.52; it’s down to 120.72 as of this writing (it dropped two percent while I
was writing this blog), and it will probably dive further. Why? Because you can stack all
the exposés on Goldman you want by degenerates like me and the McClatchy group,
and you can even have a Senate subcommittee call for your executives to be tried for
perjury, but that doesn’t necessarily move the Street.
But when one of the firm’s own partners is saying out loud that his company liked to "rip
the eyeballs out" of "muppets" like you, then you start to wonder if maybe this firm is the
best choice for managing your money. Hence we see headlines this morning like this
item from Forbes.com: "Greg Smith Quits, Should Clients Fire Goldman Sachs?"
This always had to be the endgame for reforming Wall Street. It was never going to
happen by having the government sweep through and impose a wave of draconian
new regulations, although a more vigorous enforcement of existing laws might have
helped. Nor could the Occupy protests or even a monster wave of civil lawsuits hope to
really change the screw-your-clients, screw-everybody, grab-what-you-can culture of
the modern financial services industry.
Real change was always going to have to come from within Wall Street itself, and the
surest way for that to happen is for the managers of pension funds and union retirement
funds and other institutional investors to see that the Goldmans of the world aren't just
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arrogant sleazebags, they’re also not terribly good at managing your money. As Smith
writes:
It astounds me how little senior management gets a basic truth: If clients don't trust you
they will eventually stop doing business with you. It doesn't matter how smart you are…
These days, the most common question I get from junior analysts about derivatives is,
"How much money did we make off the client" It bothers me every time I hear it,
because it is a clear reflection of what they are observing from their leaders about the
way they should behave.
Banking, and finance, is a business that has to be first and foremost about trust. The
reason you're paying your broker/money manager such exorbitant sums is because
that’s the value of integrity and honesty: You're paying for the comfort of knowing he has
your best interests at heart.
But what we’ve found out in the last years is that these Too-Big-To-Fail megabanks like
Goldman no longer see the margin in being truly trustworthy. The game now is about
getting paid as much as possible and as quickly as possible, and if your client doesn’t like
the way you managed his money, well, fuck him – let him try to find someone else on the
market to deal him straight.
These guys have lost the fear of going out of business, because they can’t go out of
business. After all, our government won’t let them. Beyond the bailouts, they’re all
subsisting daily on massive loads of free cash from the Fed. No one can touch them, and
sadly, most of the biggest institutional clients see getting clipped for a few points by
Goldman or Chase as the cost of doing business.
The only way to break this cycle, since our government doesn't seem to want to end its
habit of financially supporting fraud-committing, repeat-offending, client-fleecing banks,
is for these big "muppet" clients to start taking their business elsewhere. Right now, many
clients stay because they think that even if Goldman takes a bite out of them here and
there, the bank still has the smartest guys in the room. But as Forbes writes this morning,
this incident may turn Goldman into such a pariah that the best young bankers won't
want to work there anymore:
Until a wave of talented people leave Goldman and go work for some other bank, many
clients will stick with Goldman and hope for the best. That's why the biggest threat to
Goldman's survival is that Smith’s departure — and the reasons he publicized so nicely in
his Times op-ed — leads to a wider talent exodus.
Anyway, Smith's op-ed is a brave and thoughtful piece of writing:
My proudest moments in life — getting a full scholarship to go from South Africa to
Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze
medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics
— have all come through hard work, with no shortcuts. Goldman Sachs today has
become too much about shortcuts and not enough about achievement. It just doesn’t
feel right to me anymore.
There are a lot of people who just want to tear Wall Street down and start over again,
but what Smith did in this piece was show that people like him can be part of the
solution. What he did couldn’t have been easy – kudos to him, and let's hope the
inevitable blowback sent his way won't be too rough.
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On the Phenomenon of Bullshit Jobs
By David Graber (from Strike! Magazine)
In the year 1930, John Maynard Keynes predicted that, by century’s end, technology
would have advanced sufficiently that countries like Great Britain or the United States
would have achieved a 15-hour work week. There’s every reason to believe he was right.
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In technological terms, we are quite capable of this. And yet it didn’t happen. Instead,
technology has been marshaled, if anything, to figure out ways to make us all work
more. In order to achieve this, jobs have had to be created that are, effectively,
pointless. Huge swathes of people, in Europe and North America in particular, spend their
entire working lives performing tasks they secretly believe do not really need to be
performed. The moral and spiritual damage that comes from this situation is profound. It
is a scar across our collective soul. Yet virtually no one talks about it.
Why did Keynes’ promised utopia – still being eagerly awaited in the ‘60s – never
materialise? The standard line today is that he didn’t figure in the massive increase in
consumerism. Given the choice between less hours and more toys and pleasures, we’ve
collectively chosen the latter. This presents a nice morality tale, but even a moment’s
reflection shows it can’t really be true. Yes, we have witnessed the creation of an endless
variety of new jobs and industries since the ‘20s, but very few have anything to do with
the production and distribution of sushi, iPhones, or fancy sneakers.
So what are these new jobs, precisely? A recent report comparing employment in the US
between 1910 and 2000 gives us a clear picture (and I note, one pretty much exactly
echoed in the UK). Over the course of the last century, the number of workers employed
as domestic servants, in industry, and in the farm sector has collapsed dramatically. At
the same time, “professional, managerial, clerical, sales, and service workers” tripled,
growing “from one-quarter to three-quarters of total employment.” In other words,
productive jobs have, just as predicted, been largely automated away (even if you
count industrial workers globally, including the toiling masses in India and China, such
workers are still not nearly so large a percentage of the world population as they used to
be).
But rather than allowing a massive reduction of working hours to free the world’s
population to pursue their own projects, pleasures, visions, and ideas, we have seen the
ballooning not even so much of the “service” sector as of the administrative sector, up to
and including the creation of whole new industries like financial services or
telemarketing, or the unprecedented expansion of sectors like corporate law, academic
and health administration, human resources, and public relations. And these numbers do
not even reflect on all those people whose job is to provide administrative, technical, or
security support for these industries, or for that matter the whole host of ancillary industries
(dog-washers, all-night pizza deliverymen) that only exist because everyone else is
spending so much of their time working in all the other ones.
These are what I propose to call “bullshit jobs.”
It’s as if someone were out there making up pointless jobs just for the sake of keeping us
all working. And here, precisely, lies the mystery. In capitalism, this is precisely what is not
supposed to happen. Sure, in the old inefficient socialist states like the Soviet Union,
where employment was considered both a right and a sacred duty, the system made up
as many jobs as they had to (this is why in Soviet department stores it took three clerks to
sell a piece of meat). But, of course, this is the sort of very problem market competition is
supposed to fix. According to economic theory, at least, the last thing a profit-seeking
firm is going to do is shell out money to workers they don’t really need to employ. Still,
somehow, it happens.
While corporations may engage in ruthless downsizing, the layoffs and speed-ups
invariably fall on that class of people who are actually making, moving, fixing and
maintaining things; through some strange alchemy no one can quite explain, the
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number of salaried paper-pushers ultimately seems to expand, and more and more
employees find themselves, not unlike Soviet workers actually, working 40 or even 50 hour
weeks on paper, but effectively working 15 hours just as Keynes predicted, since the rest
of their time is spent organizing or attending motivational seminars, updating their
facebook profiles or downloading TV box-sets.
The answer clearly isn’t economic: it’s moral and political. The ruling class has figured out
that a happy and productive population with free time on their hands is a mortal danger
(think of what started to happen when this even began to be approximated in the ‘60s).
And, on the other hand, the feeling that work is a moral value in itself, and that anyone
not willing to submit themselves to some kind of intense work discipline for most of their
waking hours deserves nothing, is extraordinarily convenient for them.
Once, when contemplating the apparently endless growth of administrative
responsibilities in British academic departments, I came up with one possible vision of hell.
Hell is a collection of individuals who are spending the bulk of their time working on a task
they don’t like and are not especially good at. Say they were hired because they were
excellent cabinet-makers, and then discover they are expected to spend a great deal
of their time frying fish. Neither does the task really need to be done – at least, there’s
only a very limited number of fish that need to be fried. Yet somehow, they all become
so obsessed with resentment at the thought that some of their co-workers might be
spending more time making cabinets, and not doing their fair share of the fish-frying
responsibilities, that before long there’s endless piles of useless badly cooked fish piling up
all over the workshop and it’s all that anyone really does.
I think this is actually a pretty accurate description of the moral dynamics of our own
economy.
Now, I realise any such argument is going to run into immediate objections: “who are you
to say what jobs are really ‘necessary’? What’s necessary anyway? You’re an
anthropology professor, what’s the ‘need’ for that?” (And indeed a lot of tabloid readers
would take the existence of my job as the very definition of wasteful social expenditure.)
And on one level, this is obviously true. There can be no objective measure of social
value.
I would not presume to tell someone who is convinced they are making a meaningful
contribution to the world that, really, they are not. But what about those people who are
themselves convinced their jobs are meaningless? Not long ago I got back in touch with
a school friend who I hadn’t seen since I was 12. I was amazed to discover that in the
interim, he had become first a poet, then the front man in an indie rock band. I’d heard
some of his songs on the radio having no idea the singer was someone I actually knew.
He was obviously brilliant, innovative, and his work had unquestionably brightened and
improved the lives of people all over the world. Yet, after a couple of unsuccessful
albums, he’d lost his contract, and plagued with debts and a newborn daughter, ended
up, as he put it, “taking the default choice of so many directionless folk: law school.”
Now he’s a corporate lawyer working in a prominent New York firm. He was the first to
admit that his job was utterly meaningless, contributed nothing to the world, and, in his
own estimation, should not really exist.
There’s a lot of questions one could ask here, starting with, what does it say about our
society that it seems to generate an extremely limited demand for talented poetmusicians, but an apparently infinite demand for specialists in corporate law? (Answer: if
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1% of the population controls most of the disposable wealth, what we call “the market”
reflects what they think is useful or important, not anybody else.) But even more, it shows
that most people in these jobs are ultimately aware of it. In fact, I’m not sure I’ve ever
met a corporate lawyer who didn’t think their job was bullshit. The same goes for almost
all the new industries outlined above. There is a whole class of salaried professionals that,
should you meet them at parties and admit that you do something that might be
considered interesting (an anthropologist, for example), will want to avoid even
discussing their line of work entirely. Give them a few drinks, and they will launch into
tirades about how pointless and stupid their job really is.
This is a profound psychological violence here. How can one even begin to speak of
dignity in labour when one secretly feels one’s job should not exist? How can it not
create a sense of deep rage and resentment. Yet it is the peculiar genius of our society
that its rulers have figured out a way, as in the case of the fish-fryers, to ensure that rage
is directed precisely against those who actually do get to do meaningful work. For
instance: in our society, there seems a general rule that, the more obviously one’s work
benefits other people, the less one is likely to be paid for it. Again, an objective measure
is hard to find, but one easy way to get a sense is to ask: what would happen were this
entire class of people to simply disappear? Say what you like about nurses, garbage
collectors, or mechanics, it’s obvious that were they to vanish in a puff of smoke, the
results would be immediate and catastrophic. A world without teachers or dock-workers
would soon be in trouble, and even one without science fiction writers or ska musicians
would clearly be a lesser place. It’s not entirely clear how humanity would suffer were all
private equity CEOs, lobbyists, PR researchers, actuaries, telemarketers, bailiffs or legal
consultants to similarly vanish. (Many suspect it might markedly improve.) Yet apart from
a handful of well-touted exceptions (doctors), the rule holds surprisingly well.
Even more perverse, there seems to be a broad sense that this is the way things should
be. This is one of the secret strengths of right-wing populism. You can see it when tabloids
whip up resentment against tube workers for paralysing London during contract disputes:
the very fact that tube workers can paralyse London shows that their work is actually
necessary, but this seems to be precisely what annoys people. It’s even clearer in the US,
where Republicans have had remarkable success mobilizing resentment against school
teachers, or auto workers (and not, significantly, against the school administrators or auto
industry managers who actually cause the problems) for their supposedly bloated wages
and benefits. It’s as if they are being told “but you get to teach children! Or make cars!
You get to have real jobs! And on top of that you have the nerve to also expect middleclass pensions and health care?”
If someone had designed a work regime perfectly suited to maintaining the power of
finance capital, it’s hard to see how they could have done a better job. Real, productive
workers are relentlessly squeezed and exploited. The remainder are divided between a
terrorised stratum of the, universally reviled, unemployed and a larger stratum who are
basically paid to do nothing, in positions designed to make them identify with the
perspectives and sensibilities of the ruling class (managers, administrators, etc) – and
particularly its financial avatars – but, at the same time, foster a simmering resentment
against anyone whose work has clear and undeniable social value. Clearly, the system
was never consciously designed. It emerged from almost a century of trial and error. But
it is the only explanation for why, despite our technological capacities, we are not all
working 3-4 hour days.
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76
Why Wall Street Always Blows It
By Henry Blodget (from The Atlantic)
WELL, WE DID it again. Only eight years after the last big financial boom ended in
disaster, we’re now in the migraine hangover of an even bigger one—a global housing
and debt bubble whose bursting has wiped out tens of trillions of dollars of wealth and
brought the world to the edge of a second Great Depression.
Millions have lost their houses. Millions more have lost their retirement savings. Tens of
millions have had their portfolios smashed. And the carnage in the “real economy” has
only just begun.
What the hell happened? After decades of increasing financial sophistication, weren’t
we supposed to be done with these things? Weren’t we supposed to know better?
Yes, of course. Every time this happens, we think it will be the last time. But it never will be.
First things first: for better and worse, I have had more professional experience with
financial bubbles than I would ever wish on anyone. During the dot-com episode, as you
may unfortunately recall, I was a famous tech-stock analyst at Merrill Lynch. I was famous
because I was on the right side of the boom through the late 1990s, when stocks were
storming to record-high prices every year—Internet stocks, especially. By late 1998, I was
cautioning clients that “what looks like a bubble probably is,” but this didn’t save me.
Fifteen months later, I missed the top and drove my clients right over the cliff.
Later, in the smoldering aftermath, as you may also unfortunately recall, I was accused
by Eliot Spitzer, then New York’s attorney general, of having hung on too long in order to
curry favor with the companies I was analyzing, some of which were also Merrill banking
clients. This allegation led to my banishment from the industry, though it didn’t explain
why I had followed my own advice and blown my own portfolio to smithereens (more on
this later).
I experienced the next bubble differently—as a journalist and homeowner. Having
already learned the most obvious lesson about bubbles, which is that you don’t want to
get out too late, I now discovered something nearly as obvious: you don’t want to get
out too early. Figuring that the roaring housing market was just another tech-stock
bubble in the making, I rushed to sell my house in 2003—only to watch its price nearly
double over the next three years. I also predicted the demise of the Manhattan realestate market on the cover of New York magazine in 2005. Prices are finally falling now, in
2008, but they’re still well above where they were then.
Live through enough bubbles, though, and you do eventually learn something of value.
For example, I’ve learned that although getting out too early hurts, it hurts less than
getting out too late. More important, I’ve learned that most of the common wisdom
about financial bubbles is wrong.
WHO’S TO BLAME for the current crisis? As usually happens after a crash, the search for
scapegoats has been intense, and many contenders have emerged: Wall Street
swindled us; predatory lenders sold us loans we couldn’t afford; the Securities and
Exchange Commission fell asleep at the switch; Alan Greenspan kept interest rates low
for too long; short-sellers spread negative rumors; “experts” gave us bad advice. Moreintrospective folks will add other explanations: we got greedy; we went nuts; we heard
what we wanted to hear.
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All of these explanations have some truth to them. Predatory lenders did bamboozle
some people into loans and houses they couldn’t afford. The SEC and other regulators
did miss opportunities to curb some of the more egregious behavior. Alan Greenspan did
keep interest rates too low for too long (and if you’re looking for the single biggest cause
of the housing bubble, this is it). Some short-sellers did spread negative rumors. And, Lord
knows, many of us got greedy, checked our brains at the door, and heard what we
wanted to hear.
But most bubbles are the product of more than just bad faith, or incompetence, or rank
stupidity; the interaction of human psychology with a market economy practically
ensures that they will form. In this sense, bubbles are perfectly rational—or at least they’re
a rational and unavoidable by-product of capitalism (which, as Winston Churchill might
have said, is the worst economic system on the planet except for all the others).
Technology and circumstances change, but the human animal doesn’t. And markets
are ultimately about people.
To understand why bubble participants make the decisions they do, let’s roll back the
clock to 2002. The stock-market crash has crushed our portfolios and left us feeling
vulnerable, foolish, and poor. We’re not wiped out, thankfully, but we’re chastened, and
we’re certainly not going to go blow our extra money on Cisco Systems again. So where
should we put it? What’s safe? How about a house?
House prices, we are told by our helpful neighborhood real-estate agent, almost never
go down. This sounds right, and they certainly didn’t go down in the stock-market crash.
In fact, for as long as we can remember—about 10 years, in most cases—house prices
haven’t gone down. (Wait, maybe there was a slight dip, after the 1987 stock-market
crash, but looming larger in our memories is what’s happened since; everyone we know
who’s bought a house since the early 1990s has made gobs of money.)
We consider following our agent’s advice, but then we decide against it. House prices
have doubled since the mid-1990s; we’re not going to get burned again by buying at
the top. So we decide to just stay in our rent-stabilized rabbit warren and wait for house
prices to collapse.
Unfortunately, they don’t. A year later, they’ve risen at least another 10 percent. By 2006,
we’re walking past neighborhood houses that we could have bought for about half as
much four years ago; we wave to happy new neighbors who are already deep in the
money. One neighbor has “unlocked the value in his house” by taking out a cheap
home-equity loan, and he’s using the proceeds to build a swimming pool. He is also
doing well, along with two visionary friends, by buying and flipping other houses—so well,
in fact, that he’s considering quitting his job and becoming a full-time real-estate
developer. After four years of resistance, we finally concede—houses might be a good
investment after all—and call our neighborhood real-estate agent. She’s jammed (and
driving a new BMW), but she agrees to fit us in.
We see five houses: two were on the market two years ago for 30 percent less (we just
can’t handle the pain of that); two are dumps; and the fifth, which we love, is listed at a
positively ridiculous price. The agent tells us to hurry—if we don’t bid now, we’ll lose the
house. But we’re still hesitant: last week, we read an article in which some economist was
predicting a housing crash, and that made us nervous. (Our agent counters that
Greenspan says the housing market’s in good shape, and he isn’t known as “The
Maestro” for nothing.)
When we get home, we call our neighborhood mortgage broker, who gives us a
surprisingly reasonable quote—with a surprisingly small down payment. It’s a new kind of
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loan, he says, called an adjustable-rate mortgage, which is the same kind our neighbor
has. The payments will “reset” in three years, but, as the mortgage broker suggests, we’ll
probably have moved up to a bigger house by then. We discuss the house during dinner
and breakfast. We review our finances to make sure we can afford it. Then, the next
afternoon, we call the agent to place a bid. And the house is already gone—at 10
percent above the asking price.
By the spring of 2007, we’ve finally caught up to the market reality, and our luck finally
changes: We make an instant, aggressive bid on a huge house, with almost no money
down. And we get it! We’re finally members of the ownership society.
You know the rest. Eighteen months later, our down payment has been wiped out and
we owe more on the house than it’s worth. We’re still able to make the payments, but
our mortgage rate is about to reset. And we’ve already heard rumors about coming
layoffs at our jobs. How on Earth did we get into this mess?
The exact answer is different in every case, of course. But let’s round up the usual
suspects:
• The predatory mortgage broker? Well, we’re certainly not happy with the bastard,
given that he sold us a loan that is now a ticking time bomb. But we did ask him to show
us a range of options, and he didn’t make us pick this one. We picked it because it had
the lowest payment.
• Our sleazy real-estate agent? We’re not speaking to her anymore, either (and we’re
secretly stoked that her BMW just got repossessed), but again, she didn’t lie to us. She just
kept saying that houses are usually a good investment. And she is, after all, a
saleswoman; that was never very hard to figure out.
• Wall Street fat cats? Boy, do we hate those guys, especially now that our tax dollars are
bailing them out. But we didn’t complain when our lender asked for such a small down
payment without bothering to check how much money we made. At the time, we
thought that was pretty great.
• The SEC? We’re furious that our government let this happen to us, and we’re sure
someone is to blame. We’re not really sure who that someone is, though. Whoever is
responsible for making sure that something like this never happens to us, we guess.
• Alan “The Maestro” Greenspan? We’re pissed at him too. If he hadn’t been out there
saying everything was fine, we might have believed that economist who said it wasn’t.
• Bad advice? Hell, yes, we got bad advice. Our real-estate agent. That mortgage guy.
Our neighbor. Greenspan. The media. They all gave us horrendous advice. We should
have just waited for the market to crash. But everyone said it was different this time.
Still, except in cases involving outright fraud—a small minority—the buck stops with us.
Not knowing that the market would crash isn’t an excuse. No one knew the market
would crash, even the analysts who predicted that it would. (Just as important, no one
knew when prices would go down, or how fast.) And for years, most of the skeptics
looked—and felt—like fools.
Everyone else on that list above bears some responsibility too. But in the case I have
described, it would be hard to say that any of them acted criminally. Or irrationally. Or
even irresponsibly. In fact, almost everyone on that list acted just the way you would
expect them to act under the circumstances.
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THAT’S ESPECIALLY TRUE for the professionals on Wall Street, who’ve come in for more
criticism than anyone in recent months, and understandably so. It was Wall Street, after
all, that chose not only to feed the housing bubble, but ultimately to bet so heavily on it
as to put the entire financial system at risk. How did the experts who are paid to obsess
about the direction of the market—allegedly the most financially sophisticated among
us—get it so badly wrong? The answer is that the typical financial professional is a lot
more like our hypothetical home buyer than anyone on Wall Street would care to admit.
Given the intersection of experience, uncertainty, and self-interest within the finance
industry, it should be no surprise that Wall Street blew it—or that it will do so again.
Take experience (or the lack thereof). Boom-and-bust cycles like the one we just went
through take a long time to complete. The really big busts, in fact, the ones that affect
the whole market and economy, are usually separated by more than 30 years—think
1929, 1966, and 2000. (Why did the housing bubble follow the tech bubble so closely?
Because both were really just parts of a larger credit bubble, which had been building
since the late 1980s. That bubble didn’t deflate after the 2000 crash, in part thanks to
Greenspan’s attempts to save the economy.) By the time the next Great Bubble rolls
around, a lot of us will be as dead and gone as Richard Whitney, Jesse Livermore,
Charles Mitchell, and the other giants of the 1929 crash. (Never heard of them? Exactly.)
Since Wall Street replenishes itself with a new crop of fresh faces every year—many of the
professionals at the elite firms either flame out or retire by age 40—most of the industry
doesn’t usually have experience with both booms and busts. In the 1990s, I and
thousands of young Wall Street analysts and investors like me hadn’t seen anything but a
15-year bull market. The only market shocks that we knew much about—the 1987 crash,
say, or Mexico’s 1994 financial crisis—had immediately been followed by strong
recoveries (and exhortations to “buy the dip”).
By 1996, when Greenspan made his famous “irrational exuberance” remark, the stock
market’s valuation was nearing its peak from prior bull markets, making some veteran
investors nervous. Over the next few years, however, despite confident predictions of
doom, stocks just kept going up. And eventually, inevitably, this led to assertions that no
peak was in sight, much less a crash—you see, it was “different this time.”
Those are said to be the most expensive words in the English language, by the way: it’s
different this time. You can’t have a bubble without good explanations for why it’s
different this time. If everyoneknew that this time wasn’t different, the market would stop
going up. But the future is always uncertain—and amid uncertainty, all sorts of faithbased theories can flourish, even on Wall Street.
In the 1920s, the “differences” were said to be the miraculous new technologies (phones,
cars, planes) that would speed the economy, as well as Prohibition, which was supposed
to produce an ultra-efficient, ultra-responsible workforce. (Don’t laugh: one of the most
respected economists of the era, Irving Fisher of Yale University, believed that one.) In the
tech bubble of the 1990s, the differences were low interest rates, low inflation, a
government budget surplus, the Internet revolution, and a Federal Reserve chairman
apparently so divinely talented that he had made the business cycle obsolete. In the
housing bubble, they were low interest rates, population growth, new mortgage
products, a new ownership society, and, of course, the fact that “they aren’t making any
more land.”
In hindsight, it’s obvious that all these differences were bogus (they’ve never made any
more land—except in Dubai, which now has its own problems). At the time, however,
with prices going up every day, things sure seemed different.
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In fairness to the thousands of experts who’ve snookered themselves throughout the
years, a complicating factor is always at work: the ever-present possibility that it
really might have been different. Everything is obvious only after the crash.
Consider, for instance, the late 1950s, when a tried-and-true “sell signal” started flashing
on Wall Street. For the first time in years, stock prices had risen so high that the dividend
yield on stocks had fallen below the coupon yield on bonds. To anyone who had been
around for a while, this seemed ridiculous: stocks are riskier than bonds, so a rational
buyer must be paid more to own them. Wise, experienced investors sold their stocks and
waited for this obvious mispricing to correct itself. They’re still waiting.
Why? Because that time, it was different. There were increasing concerns about inflation,
which erodes the value of fixed bond-interest payments. Stocks offer more protection
against inflation, so their value relative to bonds had increased. By the time the prudent
folks who sold their stocks figured this out, however, they’d missed out on many years of a
raging bull market.
When I was on Wall Street, the embryonic Internet sector was different, of course—at
least to those of us who were used to buying staid, steady stocks that went up 10 percent
in a good year. Most Internet companies didn’t have earnings, and some of them barely
had revenue. But the performance of some of their stocks was spectacular.
In 1997, I recommended that my clients buy stock in a company called Yahoo; the stock
finished the year up more than 500 percent. The next year, I put a $400-a-share price
target on a controversial “online bookseller” called Amazon, worth about $240 a share at
the time; within a month, the stock blasted through $400 en route to $600. You don’t
have to make too many calls like these before people start listening to you; I soon had a
global audience keenly interested in whatever I said.
One of the things I said frequently, especially after my Amazon prediction, was that the
tech sector’s stock behavior sure looked like a bubble. At the end of 1998, in fact, I
published a report called “Surviving (and Profiting From) Bubble.com,” in which I listed
similarities between the dot-com phenomenon and previous boom-and-bust cycles in
biotech, personal computers, and other sectors. But I recommended that my clients own
a few high-quality Internet stocks anyway—because of the ways in which I thought the
Internet was different. I won’t spell out all those ways, but I will say that they sounded less
stupid then than they do now.
The bottom line is that resisting the siren call of a boom is much easier when you have
already been obliterated by one. In the late 1990s, as stocks kept roaring higher, it got
easier and easier to believe that something really was different. So, in early 2000, weeks
before the bubble burst, I put a lot of money where my mouth was. Two years later, I had
lost the equivalent of six high-end college educations.
Of course, as Eliot Spitzer and others would later observe—and as was crystal clear to
most Wall Street executives at the time—being bullish in a bull market is undeniably good
for business. When the market is rising, no one wants to work with a bear.
WHICH BRINGS US to the last major contributor to booms and busts: self-interest.
When people look back on bubbles, many conclude that the participants must have
gone stark raving mad. In most cases, nothing could be further from the truth.
In my example from the housing boom, for instance, each participant’s job was not to
predict what the housing market would do but to accomplish a more concrete aim. The
buyer wanted to buy a house; the real-estate agent wanted to earn a commission; the
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mortgage broker wanted to sell a loan; Wall Street wanted to buy loans so it could
package and resell them as “mortgage-backed securities”; Alan Greenspan wanted to
keep American prosperity alive; members of Congress wanted to get reelected. None of
these participants, it is important to note, was paid to predict the likely future movements
of the housing market. In every case (except, perhaps, the buyer’s), that was, at best, a
minor concern.
This does not make the participants villains or morons. It does, however, illustrate another
critical component of boom-time decision-making: the difference between investment
risk and career or business risk.
Professional fund managers are paid to manage money for their clients. Most managers
succeed or fail based not on how much money they make or lose but on how much
they make or lose relative to the market and other fund managers.
If the market goes up 20 percent and your Fidelity fund goes up only 10 percent, for
example, you probably won’t call Fidelity and say, “Thank you.” Instead, you’ll probably
call and say, “What am I paying you people for, anyway?” (Or at least that’s what a lot
of investors do.) And if this performance continues for a while, you might eventually fire
Fidelity and hire a new fund manager.
On the other hand, if your Fidelity fund declines in value but the market drops even
more, you’ll probably stick with the fund for a while (“Hey, at least I didn’t lose as much
as all those suckers in index funds”). That is, until the market drops so much that you can’t
take it anymore and you sell everything, which is what a lot of people did in October,
when the Dow plunged below 9,000.
In the money-management business, therefore, investment risk is the risk that your bets
will costyour clients money. Career or business risk, meanwhile, is the risk that your bets will
cost you or your firm money or clients.
The tension between investment risk and business risk often leads fund managers to make
decisions that, to outsiders, seem bizarre. From the fund managers’ perspective,
however, they’re perfectly rational.
In the late 1990s, while I was trying to figure out whether it was different this time, some of
the most legendary fund managers in the industry were struggling. Since 1995, any fund
managers who had been bearish had not been viewed as “wise” or “prudent”; they had
been viewed as “wrong.” And because being wrong meant underperforming, many
had been shown the door.
It doesn’t take very many of these firings to wake other financial professionals up to the
fact that being bearish and wrong is at least as risky as being bullish and wrong. The
ultimate judge of who is “right” and “wrong” on Wall Street, moreover, is the market,
which posts its verdict day after day, month after month, year after year. So over time, in
a long bull market, most of the bears get weeded out, through either attrition or
capitulation.
By mid-1999, with mountains of money being made in tech stocks, fund owners were
more impatient than ever: their friends were getting rich in Cisco, so their fund manager
had better own Cisco—or he or she was an idiot. And if the fund manager thought Cisco
was overvalued and was eventually going to crash? Well, in those years, fund managers
usually approached this type of problem in of one of three ways: they refused to play;
they played and tried to win; or they split the difference.
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In the first camp was an iconic hedge-fund manager named Julian Robertson. For almost
two decades, Robertson’s Tiger Management had racked up annual gains of about 30
percent by, as he put it, buying the best stocks and shorting the worst. (One of the worst,
in Robertson’s opinion, was Amazon, and he used to summon me to his office and
demand to know why everyone else kept buying it.)
By 1998, Robertson was short Amazon and other tech stocks, and by 2000, after
the NASDAQ had jumped an astounding 86 percent the previous year, Robertson’s
business and reputation had been mauled. Thanks to poor performance and investor
withdrawals, Tiger’s assets under management had collapsed from about $20billion to
about $6billion, and the firm’s revenues had collapsed as well. Robertson refused to
change his stance, however, and in the spring of 2000, he threw in the towel: he closed
Tiger’s doors and began returning what was left of his investors’ money.
Across town, meanwhile, at Soros Fund Management, a similar struggle was taking
place, with another titanic fund manager’s reputation on the line. In 1998, the firm had
gotten crushed as a result of its bets against technology stocks (among other reasons).
Midway through 1999, however, the manager of Soros’s Quantum Fund, Stanley
Druckenmiller, reversed that position and went long on technology. Why? Because unlike
Robertson, Druckenmiller viewed it as his job to make money no matter what the market
was doing, not to insist that the market was wrong.
At first, the bet worked: the reversal saved 1999 and got 2000 off to a good start. But by
the end of April, Quantum was down a shocking 22 percent for the year, and
Druckenmiller had resigned: “We thought it was the eighth inning, and it was the ninth.”
Robertson and Druckenmiller stuck to their guns and played the extremes (and lost).
Another fund manager, a man I’ll call the Pragmatist, split the difference.
The Pragmatist had owned tech stocks for most of the 1990s, and their spectacular
performance had made his fund famous and his firm rich. By mid-1999, however, the
Pragmatist had seen a bust in the making and begun selling tech, so his fund had started
to underperform. Just one quarter later, his boss, tired of watching assets flow out the
door, suggested that the Pragmatist reconsider his position on tech. A quarter after that,
his boss made it simpler for him: buy tech, or you’re fired.
The Pragmatist thought about quitting. But he knew what would happen if he did: his
boss would hire a 25-year-old gunslinger who would immediately load up the fund with
tech stocks. The Pragmatist also thought about refusing to follow the order. But that
would mean he would be fired for cause (no severance or bonus), and his boss would
hire the same 25-year-old gunslinger.
In the end, the Pragmatist compromised. He bought enough tech stocks to pacify his
boss but not enough to entirely wipe out his fund holders if the tech bubble popped. A
few months later, when the market crashed and the fund got hammered, he took his
bonus and left the firm.
This tension between investment risk and career or business risk comes into play in other
areas of Wall Street too. It was at the center of the decisions made in the past few years
by half a dozen seemingly brilliant CEOs whose firms no longer exist.
Why did Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, and the rest of
an ever-growing Wall Street hall of shame take so much risk that they ended up blowing
their firms to kingdom come? Because in a bull market, when you borrow and bet $30 for
every $1 you have in capital, as many firms did, you can do mind-bogglingly well. And
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when your competitors are betting the same $30 for every $1, and your shareholders are
demanding that you do better, and your bonus is tied to how much money your firm
makes—not over the long term, but this year, before December 31—the downside to
refusing to ride the bull market comes into sharp relief. And when naysayers have been
so wrong for so long, and your risk-management people assure you that you’re in good
shape unless we have another Great Depression (which we won’t, of course, because
it’s different this time), well, you can easily convince yourself that disaster is a possibility so
remote that it’s not even worth thinking about.
It’s easy to lay the destruction of Wall Street at the feet of the CEOs and directors, and
the bulk of the responsibility does lie with them. But some of it lies with shareholders and
the whole model of public ownership. Wall Street never has been—and likely never will
be—paid primarily for capital preservation. However, in the days when Wall Street firms
were funded primarily by capital contributed by individual partners, preserving that
capital in the long run was understandably a higher priority than it is today. Now Wall
Street firms are primarily owned not by partners with personal capital at risk but by
demanding institutional shareholders examining short-term results. When your fiduciary
duty is to manage the firm for the benefit of your shareholders, you can easily persuade
yourself that you’re just balancing risk and reward—when what you’re really doing is
betting the firm.
AS WE WORK our way through the wreckage of this latest colossal bust, our
government—at our urging—will go to great lengths to try to make sure such a bust
never happens again. We will “fix” the “problems” that we decide caused the debacle;
we will create new regulatory requirements and systems; we will throw a lot of people in
jail. We will do whatever we must to assure ourselves that it will be different next time.
And as long as the searing memory of this disaster is fresh in the public mind, it will be
different. But as the bust recedes into the past, our priorities will slowly change, and we
will begin to set ourselves up for the next great boom.
A few decades hence, when the Great Crash of 2008 is a distant memory and the
economy is humming along again, our government—at our urging—will begin to
weaken many of the regulatory requirements and systems we put in place now. Why? To
make our economy more competitive and to unleash the power of our free-market
system. We will tell ourselves it’s different, and in many ways, it will be. But the cycle will
start all over again.
So what can we learn from all this? In the words of the great investor Jeremy Grantham,
who saw this collapse coming and has seen just about everything else in his four-decade
career: “We will learn an enormous amount in a very short time, quite a bit in the medium
term, and absolutely nothing in the long term.” Of course, to paraphrase Keynes, in the
long term, you and I will be dead. Until that time comes, here are three thoughts I hope
we all can keep in mind.
First, bubbles are to free-market capitalism as hurricanes are to weather: regular, natural,
and unavoidable. They have happened since the dawn of economic history, and they’ll
keep happening for as long as humans walk the Earth, no matter how we try to stop
them. We can’t legislate away the business cycle, just as we can’t eliminate the selfinterest that makes the whole capitalist system work. We would do ourselves a favor if we
stopped pretending we can.
Second, bubbles and their aftermaths aren’t all bad: the tech and Internet bubble, for
example, helped fund the development of a global medium that will eventually be as
central to society as electricity. Likewise, the latest bust will almost certainly lead to a
smaller, poorer financial industry, meaning that many talented workers will go instead
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into other careers—that’s probably a healthy rebalancing for the economy as a whole.
The current bust will also lead to at least some regulatory improvements that endure; the
carnage of 1933, for example, gave rise to many of our securities laws and to the SEC,
without which this bust would have been worse.
Lastly, we who have had the misfortune of learning firsthand from this experience—and
in a bust this big, that group includes just about everyone—can take pains to make sure
that we, personally, never make similar mistakes again. Specifically, we can save more,
spend less, diversify our investments, and avoid buying things we can’t afford. Most of all,
a few decades down the road, we can raise an eyebrow when our children explain that
we really should get in on the new new new thing because, yes, it’s different this time.
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The Big Takeover
By Matt Taibi (from Rolling Stone Magazine)
It’s over — we’re officially, royally fucked. No empire can survive being rendered a
permanent laughingstock, which is what happened as of a few weeks ago, when the
buffoons who have been running things in this country finally went one step too far. It
happened when Treasury Secretary Timothy Geithner was forced to admit that he was
once again going to have to stuff billions of taxpayer dollars into a dying insurance giant
called AIG, itself a profound symbol of our national decline — a corporation that got rich
insuring the concrete and steel of American industry in the country’s heyday, only to
destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute
nobleman gambling away the family estate in the waning days of the British Empire.
The latest bailout came as AIG admitted to having just posted the largest quarterly loss in
American corporate history — some $61.7 billion. In the final three months of last year, the
company lost more than $27 million every hour. That’s $465,000 a minute, a yearly
income for a median American household every six seconds, roughly $7,750 a second.
And all this happened at the end of eight straight years that America devoted to
frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping
every citizen at every airport to search every purse, bag, crotch and briefcase for juice
boxes and explosive tubes of toothpaste. Yet in the end, our government had no
mechanism for searching the balance sheets of companies that held life-or-death power
over our society and was unable to spot holes in the national economy the size of Libya
(whose entire GDP last year was smaller than AIG’s 2008 losses).
So it’s time to admit it: We’re fools, protagonists in a kind of gruesome comedy about the
marriage of greed and stupidity. And the worst part about it is that we’re still in denial —
we still think this is some kind of unfortunate accident, not something that was created by
the group of psychopaths on Wall Street whom we allowed to gang-rape the American
Dream. When Geithner announced the new $30 billion bailout, the party line was that
poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what
with the financial crisis and all. Edward Liddy, the company’s CEO, actually compared it
to catching a cold: “The marketplace is a pretty crummy place to be right now,” he said.
“When the world catches pneumonia, we get it too.” In a pathetic attempt at namedropping, he even whined that AIG was being “consumed by the same issues that are
driving house prices down and 401K statements down and Warren Buffet’s investment
portfolio down.”
Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being
left out in someone else’s financial weather. He conveniently forgot to mention that AIG
had spent more than a decade systematically scheming to evade U.S. and international
regulators, or that one of the causes of its “pneumonia” was making colossal, worldsinking $500 billion bets with money it didn’t have, in a toxic and completely unregulated
derivatives market.
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Nor did anyone mention that when AIG finally got up from its seat at the Wall Street
casino, broke and busted in the afterdawn light, it owed money all over town — and that
a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay
off the other high rollers at its table. Or that this was a casino unique among all casinos,
one where middle-class taxpayers cover the bets of billionaires.
People are pissed off about this financial crisis, and about this bailout, but they’re not
pissed off enough. The reality is that the worldwide economic meltdown and the bailout
that followed were together a kind of revolution, a coup d’état. They cemented and
formalized a political trend that has been snowballing for decades: the gradual takeover
of the government by a small class of connected insiders, who used money to control
elections, buy influence and systematically weaken financial regulations.
The crisis was the coup de grâce: Given virtually free rein over the economy, these same
insiders first wrecked the financial world, then cunningly granted themselves nearly
unlimited emergency powers to clean up their own mess. And so the gambling-addict
leaders of companies like AIG end up not penniless and in jail, but with an Alien-style
death grip on the Treasury and the Federal Reserve — “our partners in the government,”
as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.
The mistake most people make in looking at the financial crisis is thinking of it in terms of
money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing
downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what
you see is a colossal power grab that threatens to turn the federal government into a
kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders
whose scheme is the securing of individual profits at the expense of an ocean of
unwitting involuntary shareholders, previously known as taxpayers.
The best way to understand the financial crisis is to understand the meltdown at AIG. AIG
is what happens when short, bald managers of otherwise boring financial bureaucracies
start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more
than a century by betting on safety-conscious policyholders — people who wear seat
belts and build houses on high ground — and then blew it all in a year or two by turning
their entire balance sheet over to a guy who acted like making huge bets with other
people’s money would make his dick bigger.
That guy — the Patient Zero of the global economic meltdown — was one Joseph
Cassano, the head of a tiny, 400-person unit within the company called AIG Financial
Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes
and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the
granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative
use of junk bonds, relied on messianic genius and a whole array of insider schemes to
evade detection while wreaking financial disaster. Cassano, by contrast, was just a
greedy little turd with a knack for selective accounting who ran his scam right out in the
open, thanks to Washington’s deregulation of the Wall Street casino. “It’s all about the
regulatory environment,” says a government source involved with the AIG bailout. “These
guys look for holes in the system, for ways they can do trades without government
interference. Whatever is unregulated, all the action is going to pile into that.”
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The mess Cassano created had its roots in an investment boom fueled in part by a
relatively new type of financial instrument called a collateralized-debt obligation. A CDO
is like a box full of diced-up assets. They can be anything: mortgages, corporate loans,
aircraft loans, credit-card loans, even other CDOs. So as X mortgage holder pays his bill,
and Y corporate debtor pays his bill, and Z credit-card debtor pays his bill, money flows
into the box.
The key idea behind a CDO is that there will always be at least some money in the box,
regardless of how dicey the individual assets inside it are. No matter how you look at a
single unemployed ex-con trying to pay the note on a six-bedroom house, he looks like a
bad investment. But dump his loan in a box with a smorgasbord of auto loans, creditcard debt, corporate bonds and other crap, and you can be reasonably sure that
somebody is going to pay up. Say $100 is supposed to come into the box every month.
Even in an apocalypse, when $90 in payments might default, you’ll still get $10. What the
inventors of the CDO did is divide up the box into groups of investors and put that $10
into its own level, or “tranche.” They then convinced ratings agencies like Moody’s and
S&P to give that top tranche the highest AAA rating — meaning it has close to zero credit
risk.
Suddenly, thanks to this financial seal of approval, banks had a way to turn their shittiest
mortgages and other financial waste into investment-grade paper and sell them to
institutional investors like pensions and insurance companies, which were forced by
regulators to keep their portfolios as safe as possible. Because CDOs offered higher rates
of return than truly safe products like Treasury bills, it was a win-win: Banks made a fortune
selling CDOs, and big investors made much more holding them.
The problem was, none of this was based on reality. “The banks knew they were selling
crap,” says a London-based trader from one of the bailed-out companies. To get AAA
ratings, the CDOs relied not on their actual underlying assets but on crazy mathematical
formulas that the banks cooked up to make the investments look safer than they really
were. “They had some back room somewhere where a bunch of Indian guys who’d
been doing nothing but math for God knows how many years would come up with some
kind of model saying that this or that combination of debtors would only default once
every 10,000 years,” says one young trader who sold CDOs for a major investment bank.
“It was nuts.”
Now that even the crappiest mortgages could be sold to conservative investors, the
CDOs spurred a massive explosion of irresponsible and predatory lending. In fact, there
was such a crush to underwrite CDOs that it became hard to find enough subprime
mortgages — read: enough unemployed meth dealers willing to buy million-dollar homes
for no money down — to fill them all. As banks and investors of all kinds took on more and
more in CDOs and similar instruments, they needed some way to hedge their massive
bets — some kind of insurance policy, in case the housing bubble burst and all that debt
went south at the same time. This was particularly true for investment banks, many of
which got stuck holding or “warehousing” CDOs when they wrote more than they could
sell. And that’s were Joe Cassano came in.
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Known for his boldness and arrogance, Cassano took over as chief of AIGFP in 2001. He
was the favorite of Maurice “Hank” Greenberg, the head of AIG, who admired the
younger man’s hard-driving ways, even if neither he nor his successors fully understood
exactly what it was that Cassano did. According to a source familiar with AIG’s internal
operations, Cassano basically told senior management, “You know insurance, I know
investments, so you do what you do, and I’ll do what I do — leave me alone.” Given a
free hand within the company, Cassano set out from his offices in London to sell a
lucrative form of “insurance” to all those investors holding lots of CDOs. His tool of choice
was another new financial instrument known as a credit-default swap, or CDS.
The CDS was popularized by J.P. Morgan, in particular by a group of young, creative
bankers who would later become known as the “Morgan Mafia,” as many of them
would go on to assume influential positions in the finance world. In 1994, in between
booze and games of tennis at a resort in Boca Raton, Florida, the Morgan gang plotted
a way to help boost the bank’s returns. One of their goals was to find a way to lend more
money, while working around regulations that required them to keep a set amount of
cash in reserve to back those loans. What they came up with was an early version of the
credit-default swap.
In its simplest form, a CDS is just a bet on an outcome. Say Bank A writes a million-dollar
mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its
mortgage risk in case the Pope can’t make his monthly payments, so it buys CDS
protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for
five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope’s
mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge
and loses his job.
When Morgan presented their plans for credit swaps to regulators in the late Nineties,
they argued that if they bought CDS protection for enough of the investments in their
portfolio, they had effectively moved the risk off their books. Therefore, they argued, they
should be allowed to lend more, without keeping more cash in reserve. A whole host of
regulators — from the Federal Reserve to the Office of the Comptroller of the Currency —
accepted the argument, and Morgan was allowed to put more money on the street.
What Cassano did was to transform the credit swaps that Morgan popularized into the
world’s largest bet on the housing boom. In theory, at least, there’s nothing wrong with
buying a CDS to insure your investments. Investors paid a premium to AIGFP, and in return
the company promised to pick up the tab if the mortgage-backed CDOs went bust. But
as Cassano went on a selling spree, the deals he made differed from traditional
insurance in several significant ways. First, the party selling CDS protection didn’t have to
post any money upfront. When a $100 corporate bond is sold, for example, someone has
to show 100 actual dollars. But when you sell a $100 CDS guarantee, you don’t have to
show a dime. So Cassano could sell investment banks billions in guarantees without
having any single asset to back it up.
Secondly, Cassano was selling so-called “naked” CDS deals. In a “naked” CDS, neither
party actually holds the underlying loan. In other words, Bank B not only sells CDS
protection to Bank A for its mortgage on the Pope — it turns around and sells protection
to Bank C for the very same mortgage. This could go on ad nauseam: You could have
Banks D through Z also betting on Bank A’s mortgage. Unlike traditional insurance,
Cassano was offering investors an opportunity to bet that someone else’s house would
burn down, or take out a term life policy on the guy with AIDS down the street. It was no
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different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay
Feely to make a field goal. Cassano was taking book for every bank that bet short on the
housing market, but he didn’t have the cash to pay off if the kick went wide.
In a span of only seven years, Cassano sold some $500 billion worth of CDS protection,
with at least $64 billion of that tied to the subprime mortgage market. AIG didn’t have
even a fraction of that amount of cash on hand to cover its bets, but neither did it
expect it would ever need any reserves. So long as defaults on the underlying securities
remained a highly unlikely proposition, AIG was essentially collecting huge and steadily
climbing premiums by selling insurance for the disaster it thought would never come.
Initially, at least, the revenues were enormous: AIGFP’s returns went from $737 million in
1999 to $3.2 billion in 2005. Over the past seven years, the subsidiary’s 400 employees
were paid a total of $3.5 billion; Cassano himself pocketed at least $280 million in
compensation. Everyone made their money — and then it all went to shit.
II. THE REGULATORS
Cassano’s outrageous gamble wouldn’t have been possible had he not had the good
fortune to take over AIGFP just as Sen. Phil Gramm — a grinning, laissez-faire ideologue
from Texas — had finished engineering the most dramatic deregulation of the financial
industry since Emperor Hien Tsung invented paper money in 806 A.D. For years,
Washington had kept a watchful eye on the nation’s banks. Ever since the Great
Depression, commercial banks — those that kept money on deposit for individuals and
businesses — had not been allowed to double as investment banks, which raise money
by issuing and selling securities. The Glass-Steagall Act, passed during the Depression,
also prevented banks of any kind from getting into the insurance business.
But in the late Nineties, a few years before Cassano took over AIGFP, all that changed.
The Democrats, tired of getting slaughtered in the fundraising arena by Republicans,
decided to throw off their old reliance on unions and interest groups and become more
“business-friendly.” Wall Street responded by flooding Washington with money, buying
allies in both parties. In the 10-year period beginning in 1998, financial companies spent
$1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. They
quickly got what they paid for. In 1999, Gramm co-sponsored a bill that repealed key
aspects of the Glass-Steagall Act, smoothing the way for the creation of financial
megafirms like Citigroup. The move did away with the built-in protections afforded by
smaller banks. In the old days, a local banker knew the people whose loans were on his
balance sheet: He wasn’t going to give a million-dollar mortgage to a homeless meth
addict, since he would have to keep that loan on his books. But a giant merged bank
might write that loan and then sell it off to some fool in China, and who cared?
The very next year, Gramm compounded the problem by writing a sweeping new law
called the Commodity Futures Modernization Act that made it impossible to regulate
credit swaps as either gambling or securities. Commercial banks — which, thanks to
Gramm, were now competing directly with investment banks for customers — were
driven to buy credit swaps to loosen capital in search of higher yields. “By ruling that
credit-default swaps were not gaming and not a security, the way was cleared for the
growth of the market,” said Eric Dinallo, head of the New York State Insurance
Department.
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The blanket exemption meant that Joe Cassano could now sell as many CDS contracts
as he wanted, building up as huge a position as he wanted, without anyone in
government saying a word. “You have to remember, investment banks aren’t in the
business of making huge directional bets,” says the government source involved in the
AIG bailout. When investment banks write CDS deals, they hedge them. But insurance
companies don’t have to hedge. And that’s what AIG did. “They just bet massively long
on the housing market,” says the source. “Billions and billions.”
In the biggest joke of all, Cassano’s wheeling and dealing was regulated by the Office
of Thrift Supervision, an agency that would prove to be defiantly uninterested in keeping
watch over his operations. How a behemoth like AIG came to be regulated by the littleknown and relatively small OTS is yet another triumph of the deregulatory instinct. Under
another law passed in 1999, certain kinds of holding companies could choose the OTS as
their regulator, provided they owned one or more thrifts (better known as savings-andloans). Because the OTS was viewed as more compliant than the Fed or the Securities
and Exchange Commission, companies rushed to reclassify themselves as thrifts. In 1999,
AIG purchased a thrift in Delaware and managed to get approval for OTS regulation of
its entire operation.
Making matters even more hilarious, AIGFP — a London-based subsidiary of an American
insurance company — ought to have been regulated by one of Europe’s more stringent
regulators, like Britain’s Financial Services Authority. But the OTS managed to convince
the Europeans that it had the muscle to regulate these giant companies. By 2007, the EU
had conferred legitimacy to OTS supervision of three mammoth firms — GE, AIG and
Ameriprise.
That same year, as the subprime crisis was exploding, the Government Accountability
Office criticized the OTS, noting a “disparity between the size of the agency and the
diverse firms it oversees.” Among other things, the GAO report noted that the entire OTS
had only one insurance specialist on staff — and this despite the fact that it was the
primary regulator for the world’s largest insurer!
“There’s this notion that the regulators couldn’t do anything to stop AIG,” says a
government official who was present during the bailout. “That’s bullshit. What you have
to understand is that these regulators have ultimate power. They can send you a letter
and say, ‘You don’t exist anymore,’ and that’s basically that. They don’t even really
need due process. The OTS could have said, ‘We’re going to pull your charter; we’re
going to pull your license; we’re going to sue you.’ And getting sued by your primary
regulator is the kiss of death.”
When AIG finally blew up, the OTS regulator ostensibly in charge of overseeing the
insurance giant — a guy named C.K. Lee — basically admitted that he had blown it. His
mistake, Lee said, was that he believed all those credit swaps in Cassano’s portfolio were
“fairly benign products.” Why? Because the company told him so. “The judgment the
company was making was that there was no big credit risk,” he explained. (Lee now
works as Midwest region director of the OTS; the agency declined to make him available
for an interview.)
In early March, after the latest bailout of AIG, Treasury Secretary Timothy Geithner took
what seemed to be a thinly veiled shot at the OTS, calling AIG a “huge, complex global
insurance company attached to a very complicated investment bank/hedge fund that
was allowed to build up without any adult supervision.” But even without that “adult
supervision,” AIG might have been OK had it not been for a complete lack of internal
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controls. For six months before its meltdown, according to insiders, the company had
been searching for a full-time chief financial officer and a chief risk-assessment officer,
but never got around to hiring either. That meant that the 18th-largest company in the
world had no one checking to make sure its balance sheet was safe and no one
keeping track of how much cash and assets the firm had on hand. The situation was so
bad that when outside consultants were called in a few weeks before the bailout, senior
executives were unable to answer even the most basic questions about their company
— like, for instance, how much exposure the firm had to the residential-mortgage market.
III. THE CRASH
Ironically, when reality finally caught up to Cassano, it wasn’t because the housing
market crapped but because of AIG itself. Before 2005, the company’s debt was rated
triple-A, meaning he didn’t need to post much cash to sell CDS protection: The solid
creditworthiness of AIG’s name was guarantee enough. But the company’s crummy
accounting practices eventually caused its credit rating to be downgraded, triggering
clauses in the CDS contracts that forced Cassano to post substantially more collateral to
back his deals.
By the fall of 2007, it was evident that AIGFP’s portfolio had turned poisonous, but like
every good Wall Street huckster, Cassano schemed to keep his insane, Earth-swallowing
gamble hidden from public view. That August, balls bulging, he announced to investors
on a conference call that “it is hard for us, without being flippant, to even see a scenario
within any kind of realm of reason that would see us losing $1 in any of those
transactions.” As he spoke, his CDS portfolio was racking up $352 million in losses. When
the growing credit crunch prompted senior AIG executives to re-examine its liabilities, a
company accountant named Joseph St. Denis became “gravely concerned” about the
CDS deals and their potential for mass destruction. Cassano responded by personally
forcing the poor sap out of the firm, telling him he was “deliberately excluded” from the
financial review for fear that he might “pollute the process.”
The following February, when AIG posted $11.5 billion in annual losses, it announced the
resignation of Cassano as head of AIGFP, saying an auditor had found a “material
weakness” in the CDS portfolio. But amazingly, the company not only allowed Cassano
to keep $34 million in bonuses, it kept him on as a consultant for $1 million a month. In
fact, Cassano remained on the payroll and kept collecting his monthly million through
the end of September 2008, even after taxpayers had been forced to hand AIG $85
billion to patch up his fuck-ups. When asked in October why the company still retained
Cassano at his $1 million-a-month rate despite his role in the probable downfall of
Western civilization, CEO Martin Sullivan told Congress with a straight face that AIG
wanted to “retain the 20-year knowledge that Mr. Cassano had.” (Cassano, who is
apparently hiding out in his lavish town house near Harrods in London, could not be
reached for comment.)
What sank AIG in the end was another credit downgrade. Cassano had written so many
CDS deals that when the company was facing another downgrade to its credit rating
last September, from AA to A, it needed to post billions in collateral — not only more cash
than it had on its balance sheet but more cash than it could raise even if it sold off every
single one of its liquid assets. Even so, management dithered for days, not believing the
company was in serious trouble. AIG was a dried-up prune, sapped of any real value,
and its top executives didn’t even know it.
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On the weekend of September 13th, AIG’s senior leaders were summoned to the offices
of the New York Federal Reserve. Regulators from Dinallo’s insurance office were there,
as was Geithner, then chief of the New York Fed. Treasury Secretary Hank Paulson, who
spent most of the weekend preoccupied with the collapse of Lehman Brothers, came in
and out. Also present, for reasons that would emerge later, was Lloyd Blankfein, CEO of
Goldman Sachs. The only relevant government office that wasn’t represented was the
regulator that should have been there all along: the OTS.
“We sat down with Paulson, Geithner and Dinallo,” says a person present at the
negotiations. “I didn’t see the OTS even once.”
On September 14th, according to another person present, Treasury officials presented
Blankfein and other bankers in attendance with an absurd proposal: “They basically
asked them to spend a day and check to see if they could raise the money privately.”
The laughably short time span to complete the mammoth task made the answer a
foregone conclusion. At the end of the day, the bankers came back and told the
government officials, gee, we checked, but we can’t raise that much. And the bailout
was on.
A short time later, it came out that AIG was planning to pay some $90 million in deferred
compensation to former executives, and to accelerate the payout of $277 million in
bonuses to others — a move the company insisted was necessary to “retain key
employees.” When Congress balked, AIG canceled the $90 million in payments.
Then, in January 2009, the company did it again. After all those years letting Cassano run
wild, and after already getting caught paying out insane bonuses while on the public till,
AIG decided to pay out another $450 million in bonuses. And to whom? To the 400 or so
employees in Cassano’s old unit, AIGFP, which is due to go out of business shortly! Yes,
that’s right, an average of $1.1 million in taxpayer-backed money apiece, to the very
people who spent the past decade or so punching a hole in the fabric of the universe!
“We, uh, needed to keep these highly expert people in their seats,” AIG spokeswoman
Christina Pretto says to me in early February.
“But didn’t these ‘highly expert people’ basically destroy your company?” I ask.
Pretto protests, says this isn’t fair. The employees at AIGFP have already taken pay cuts,
she says. Not retaining them would dilute the value of the company even further, make it
harder to wrap up the unit’s operations in an orderly fashion.
The bonuses are a nice comic touch highlighting one of the more outrageous tangents
of the bailout age, namely the fact that, even with the planet in flames, some members
of the Wall Street class can’t even get used to the tragedy of having to fly coach. “These
people need their trips to Baja, their spa treatments, their hand jobs,” says an official
involved in the AIG bailout, a serious look on his face, apparently not even half-kidding.
“They don’t function well without them.”
IV. THE POWER GRAB
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So that’s the first step in wall street’s power grab: making up things like credit-default
swaps and collateralized-debt obligations, financial products so complex and
inscrutable that ordinary American dumb people — to say nothing of federal regulators
and even the CEOs of major corporations like AIG — are too intimidated to even try to
understand them. That, combined with wise political investments, enabled the nation’s
top bankers to effectively scrap any meaningful oversight of the financial industry. In
1997 and 1998, the years leading up to the passage of Phil Gramm’s fateful act that
gutted Glass-Steagall, the banking, brokerage and insurance industries spent $350 million
on political contributions and lobbying. Gramm alone — then the chairman of the
Senate Banking Committee — collected $2.6 million in only five years.
The law passed 90-8 in the Senate, with the support of 38 Democrats, including some
names that might surprise you: Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even
John Edwards.
The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and
Bank of America — and in turn helped those companies slowly crush their smaller
competitors, leaving the major Wall Street firms with even more money and power to
lobby for further deregulatory measures. “We’re moving to an oligopolistic situation,”
Kenneth Guenther, a top executive with the Independent Community Bankers of
America, lamented after the Gramm measure was passed.
The situation worsened in 2004, in an extraordinary move toward deregulation that never
even got to a vote. At the time, the European Union was threatening to more strictly
regulate the foreign operations of America’s big investment banks if the U.S. didn’t
strengthen its own oversight. So the top five investment banks got together on April 28th
of that year and — with the helpful assistance of then-Goldman Sachs chief and future
Treasury Secretary Hank Paulson — made a pitch to George Bush’s SEC chief at the time,
William Donaldson, himself a former investment banker. The banks generously
volunteered to submit to new rules restricting them from engaging in excessively risky
activity. In exchange, they asked to be released from any lending restrictions. The
discussion about the new rules lasted just 55 minutes, and there was not a single
representative of a major media outlet there to record the fateful decision.
Donaldson OK’d the proposal, and the new rules were enough to get the EU to drop its
threat to regulate the five firms. The only catch was, neither Donaldson nor his successor,
Christopher Cox, actually did any regulating of the banks. They named a commission of
seven people to oversee the five companies, whose combined assets came to total
more than $4 trillion. But in the last year and a half of Cox’s tenure, the group had no
director and did not complete a single inspection. Great deal for the banks, which
originally complained about being regulated by both Europe and the SEC, and ended
up being regulated by no one.
Once the capital requirements were gone, those top five banks went hog-wild, jumping
ass-first into the then-raging housing bubble. One of those was Bear Stearns, which used
its freedom to drown itself in bad mortgage loans. In the short period between the 2004
change and Bear’s collapse, the firm’s debt-to-equity ratio soared from 12-1 to an insane
33-1. Another culprit was Goldman Sachs, which also had the good fortune, around
then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who
received an estimated $200 million tax deferral by joining the government), ascend to
Treasury secretary.
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Freed from all capital restraints, sitting pretty with its man running the Treasury, Goldman
jumped into the housing craze just like everyone else on Wall Street. Although it famously
scored an $11 billion coup in 2007 when one of its trading units smartly shorted the
housing market, the move didn’t tell the whole story. In truth, Goldman still had a huge
exposure come that fateful summer of 2008 — to none other than Joe Cassano.
Goldman Sachs, it turns out, was Cassano’s biggest customer, with $20 billion of exposure
in Cassano’s CDS book. Which might explain why Goldman chief Lloyd Blankfein was in
the room with ex-Goldmanite Hank Paulson that weekend of September 13th, when the
federal government was supposedly bailing out AIG.
When asked why Blankfein was there, one of the government officials who was in the
meeting shrugs. “One might say that it’s because Goldman had so much exposure to
AIGFP’s portfolio,” he says. “You’ll never prove that, but one might suppose.”
Market analyst Eric Salzman is more blunt. “If AIG went down,” he says, “there was a
good chance Goldman would not be able to collect.” The AIG bailout, in effect, was
Goldman bailing out Goldman.
Eventually, Paulson went a step further, elevating another ex-Goldmanite named
Edward Liddy to run AIG — a company whose bailout money would be coming, in part,
from the newly created TARP program, administered by another Goldman banker
named Neel Kashkari.
V. REPO MEN
There are plenty of people who have noticed, in recent years, that when they lost their
homes to foreclosure or were forced into bankruptcy because of crippling credit-card
debt, no one in the government was there to rescue them. But when Goldman Sachs —
a company whose average employee still made more than $350,000 last year, even in
the midst of a depression — was suddenly faced with the possibility of losing money on
the unregulated insurance deals it bought for its insane housing bets, the government
was there in an instant to patch the hole. That’s the essence of the bailout: rich bankers
bailing out rich bankers, using the taxpayers’ credit card.
The people who have spent their lives cloistered in this Wall Street community aren’t
much for sharing information with the great unwashed. Because all of this shit is
complicated, because most of us mortals don’t know what the hell LIBOR is or how a REIT
works or how to use the word “zero coupon bond” in a sentence without sounding stupid
— well, then, the people who do speak this idiotic language cannot under any
circumstances be bothered to explain it to us and instead spend a lot of time rolling their
eyes and asking us to trust them.
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That roll of the eyes is a key part of the psychology of Paulsonism. The state is now being
asked not just to call off its regulators or give tax breaks or funnel a few contracts to
connected companies; it is intervening directly in the economy, for the sole purpose of
preserving the influence of the megafirms. In essence, Paulson used the bailout to
transform the government into a giant bureaucracy of entitled assholedom, one that
would socialize “toxic” risks but keep both the profits and the management of the
bailed-out firms in private hands. Moreover, this whole process would be done in secret,
away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of
French novels, subprime mortgage holders and other such financial losers.
Some aspects of the bailout were secretive to the point of absurdity. In fact, if you look
closely at just a few lines in the Federal Reserve’s weekly public disclosures, you can
literally see the moment where a big chunk of your money disappeared for good. The H4
report (called “Factors Affecting Reserve Balances”) summarizes the activities of the Fed
each week. You can find it online, and it’s pretty much the only thing the Fed ever tells
the world about what it does. For the week ending February 18th, the number under the
heading “Repurchase Agreements” on the table is zero. It’s a significant number.
Why? In the pre-crisis days, the Fed used to manage the money supply by periodically
buying and selling securities on the open market through so-called Repurchase
Agreements, or Repos. The Fed would typically dump $25 billion or so in cash onto the
market every week, buying up Treasury bills, U.S. securities and even mortgage-backed
securities from institutions like Goldman Sachs and J.P. Morgan, who would then
“repurchase” them in a short period of time, usually one to seven days. This was the Fed’s
primary mechanism for controlling interest rates: Buying up securities gives banks more
money to lend, which makes interest rates go down. Selling the securities back to the
banks reduces the money available for lending, which makes interest rates go up.
If you look at the weekly H4 reports going back to the summer of 2007, you start to notice
something alarming. At the start of the credit crunch, around August of that year, you
see the Fed buying a few more Repos than usual — $33 billion or so. By November, as
private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting
even more cash than usual into the economy: $48 billion. By late December, the number
was up to $58 billion; by the following March, around the time of the Bear Stearns rescue,
the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number
was $115 billion — “out of control now,” according to one congressional aide. For the
rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as
much as $125 billion of these short-term loans into the economy — until suddenly, at the
start of this year, the number drops to nothing. Zero.
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The reason the number has dropped to nothing is that the Fed had simply stopped using
relatively transparent devices like repurchase agreements to pump its money into the
hands of private companies. By early 2009, a whole series of new government operations
had been invented to inject cash into the economy, most all of them completely
secretive and with names you’ve never heard of. There is the Term Auction Facility, the
Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper
Funding Facility and a monster called the Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym
ABCPMMMFLF). For good measure, there’s also something called a Money Market
Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout
recipients like Bear Stearns and AIG.
While the rest of America, and most of Congress, have been bugging out about the $700
billion bailout program called TARP, all of these newly created organisms in the Federal
Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands
of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in
guarantees of private investments). Although this technically isn’t taxpayer money, it still
affects taxpayers directly, because the activities of the Fed impact the economy as a
whole. And this new, secretive activity by the Fed completely eclipses the TARP program
in terms of its influence on the economy.
No one knows who’s getting that money or exactly how much of it is disappearing
through these new holes in the hull of America’s credit rating. Moreover, no one can
really be sure if these new institutions are even temporary at all — or whether they are
being set up as permanent, state-aided crutches to Wall Street, designed to
systematically suck bad investments off the ledgers of irresponsible lenders.
“They’re supposed to be temporary,” says Paul-Martin Foss, an aide to Rep. Ron Paul.
“But we keep getting notices every six months or so that they’re being renewed. They just
sort of quietly announce it.”
None other than disgraced senator Ted Stevens was the poor sap who made the
unpleasant discovery that if Congress didn’t like the Fed handing trillions of dollars to
banks without any oversight, Congress could apparently go fuck itself — or so said the
law. When Stevens asked the GAO about what authority Congress has to monitor the
Fed, he got back a letter citing an obscure statute that nobody had ever heard of
before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b),
dictated that congressional audits of the Federal Reserve may not include
“deliberations, decisions and actions on monetary policy matters.” The exemption, as
Foss notes, “basically includes everything.” According to the law, in other words, the Fed
simply cannot be audited by Congress. Or by anyone else, for that matter.
VI. WINNERS AND LOSERS
Stevens isn’t the only person in Congress to be given the finger by the Fed. In January,
when Rep. Alan Grayson of Florida asked Federal Reserve vice chairman Donald Kohn
where all the money went — only $1.2 trillion had vanished by then — Kohn gave
Grayson a classic eye roll, saying he would be “very hesitant” to name names because it
might discourage banks from taking the money.
“Has that ever happened?” Grayson asked. “Have people ever said, ‘We will not take
your $100 billion because people will find out about it?’”
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“Well, we said we would not publish the names of the borrowers, so we have no test of
that,” Kohn answered, visibly annoyed with Grayson’s meddling.
Grayson pressed on, demanding to know on what terms the Fed was lending the
money. Presumably it was buying assets and making loans, but no one knew how it was
pricing those assets — in other words, no one knew what kind of deal it was striking on
behalf of taxpayers. So when Grayson asked if the purchased assets were “marked to
market” — a methodology that assigns a concrete value to assets, based on the market
rate on the day they are traded — Kohn answered, mysteriously, “The ones that have
market values are marked to market.” The implication was that the Fed was purchasing
derivatives like credit swaps or other instruments that were basically impossible to value
objectively — paying real money for God knows what.
“Well, how much of them don’t have market values?” asked Grayson. “How much of
them are worthless?”
“None are worthless,” Kohn snapped.
“Then why don’t you mark them to market?” Grayson demanded.
“Well,” Kohn sighed, “we are marking the ones to market that have market values.”
In essence, the Fed was telling Congress to lay off and let the experts handle things. “It’s
like buying a car in a used-car lot without opening the hood, and saying, ‘I think it’s
fine,’” says Dan Fuss, an analyst with the investment firm Loomis Sayles. “The salesman
says, ‘Don’t worry about it. Trust me.’ It’ll probably get us out of the lot, but how much
farther? None of us knows.”
When one considers the comparatively extensive system of congressional checks and
balances that goes into the spending of every dollar in the budget via the normal
appropriations process, what’s happening in the Fed amounts to something truly
revolutionary — a kind of shadow government with a budget many times the size of the
normal federal outlay, administered dictatorially by one man, Fed chairman Ben
Bernanke. “We spend hours and hours and hours arguing over $10 million amendments
on the floor of the Senate, but there has been no discussion about who has been
receiving this $3 trillion,” says Sen. Bernie Sanders. “It is beyond comprehension.”
Count Sanders among those who don’t buy the argument that Wall Street firms shouldn’t
have to face being outed as recipients of public funds, that making this information
public might cause investors to panic and dump their holdings in these firms. “I guess if
we made that public, they’d go on strike or something,” he muses.
And the Fed isn’t the only arm of the bailout that has closed ranks. The Treasury, too, has
maintained incredible secrecy surrounding its implementation even of the TARP program,
which was mandated by Congress. To this date, no one knows exactly what criteria the
Treasury Department used to determine which banks received bailout funds and which
didn’t — particularly the first $350 billion given out under Bush appointee Hank Paulson.
The situation with the first TARP payments grew so absurd that when the Congressional
Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson
asking how he decided whom to give money to, Treasury responded — and this isn’t a
joke — by directing the panel to a copy of the TARP application form on its website.
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Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly
speechless by the response.
“Do you believe that?” she says incredulously. “That’s not what we had in mind.”
Another member of Congress, who asked not to be named, offers his own theory about
the TARP process. “I think basically if you knew Hank Paulson, you got the money,” he
says.
This cozy arrangement created yet another opportunity for big banks to devour market
share at the expense of smaller regional lenders. While all the bigwigs at Citi and
Goldman and Bank of America who had Paulson on speed-dial got bailed out right
away — remember that TARP was originally passed because money had to be lent right
now, that day, that minute, to stave off emergency — many small banks are still waiting
for help. Five months into the TARP program, some not only haven’t received any funds,
they haven’t even gotten a call back about their applications.
“There’s definitely a feeling among community bankers that no one up there cares much
if they make it or not,” says Tanya Wheeless, president of the Arizona Bankers Association.
Which, of course, is exactly the opposite of what should be happening, since small,
regional banks are far less guilty of the kinds of predatory lending that sank the
economy. “They’re not giving out subprime loans or easy credit,” says Wheeless. “At the
community level, it’s much more bread-and-butter banking.”
Nonetheless, the lion’s share of the bailout money has gone to the larger, so-called
“systemically important” banks. “It’s like Treasury is picking winners and losers,” says one
state banking official who asked not to be identified.
This itself is a hugely important political development. In essence, the bailout
accelerated the decline of regional community lenders by boosting the political power
of their giant national competitors.
Which, when you think about it, is insane: What had brought us to the brink of collapse in
the first place was this relentless instinct for building ever-larger megacompanies, passing
deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking
pool of Bigger Fish. To fix this problem, the government should have slowly liquidated
these monster, too-big-to-fail firms and broken them down to smaller, more manageable
companies. Instead, federal regulators closed ranks and used an almost completely
secret bailout process to double down on the same faulty, merger-happy thinking that
got us here in the first place, creating a constellation of megafirms under government
control that are even bigger, more unwieldy and more crammed to the gills with
systemic risk.
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In essence, Paulson and his cronies turned the federal government into one gigantic,
half-opaque holding company, one whose balance sheet includes the world’s most
appallingly large and risky hedge fund, a controlling stake in a dying insurance giant,
huge investments in a group of teetering megabanks, and shares here and there in
various auto-finance companies, student loans, and other failing businesses. Like AIG, this
new federal holding company is a firm that has no mechanism for auditing itself and is
run by leaders who have very little grasp of the daily operations of its disparate subsidiary
operations.
In other words, it’s AIG’s rip-roaringly shitty business model writ almost inconceivably
massive — to echo Geithner, a huge, complex global company attached to a very
complicated investment bank/hedge fund that’s been allowed to build up without adult
supervision. How much of what kinds of crap is actually on our balance sheet, and what
did we pay for it? When exactly will the rent come due, when will the money run out?
Does anyone know what the hell is going on? And on the linear spectrum of capitalism
to socialism, where exactly are we now? Is there a dictionary word that even describes
what we are now? It would be funny, if it weren’t such a nightmare.
VII. YOU DON’T GET IT
The real question from here is whether the Obama administration is going to move to
bring the financial system back to a place where sanity is restored and the general
public can have a say in things or whether the new financial bureaucracy will remain
obscure, secretive and hopelessly complex. It might not bode well that Geithner,
Obama’s Treasury secretary, is one of the architects of the Paulson bailouts; as chief of
the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the
secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it
look good when Geithner — himself a protégé of notorious Goldman alum John Thain,
the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing
out his firm — picked a former Goldman lobbyist named Mark Patterson to be his top
aide.
In fact, most of Geithner’s early moves reek strongly of Paulsonism. He has continually
talked about partnering with private investors to create a so-called “bad bank” that
would systemically relieve private lenders of bad assets — the kind of massive, opaque,
quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even
refloated a Paulson proposal to use TALF, one of the Fed’s new facilities, to essentially
lend cheap money to hedge funds to invest in troubled banks while practically
guaranteeing them enormous profits.
God knows exactly what this does for the taxpayer, but hedge-fund managers sure love
the idea. “This is exactly what the financial system needs,” said Andrew Feldstein, CEO of
Blue Mountain Capital and one of the Morgan Mafia. Strangely, there aren’t many
people who don’t run hedge funds who have expressed anything like that kind of
enthusiasm for Geithner’s ideas.
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As complex as all the finances are, the politics aren’t hard to follow. By creating an
urgent crisis that can only be solved by those fluent in a language too complex for
ordinary people to understand, the Wall Street crowd has turned the vast majority of
Americans into non-participants in their own political future. There is a reason it used to
be a crime in the Confederate states to teach a slave to read: Literacy is power. In the
age of the CDS and CDO, most of us are financial illiterates. By making an already toocomplex economy even more complex, Wall Street has used the crisis to effect a historic,
revolutionary change in our political system — transforming a democracy into a twotiered state, one with plugged-in financial bureaucrats above and clueless customers
below.
The most galling thing about this financial crisis is that so many Wall Street types think they
actually deserve not only their huge bonuses and lavish lifestyles but the awesome
political power their own mistakes have left them in possession of. When challenged,
they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages,
the hemorrhoids and gallstones they all get before they hit 40.
“But wait a minute,” you say to them. “No one ever asked you to stay up all night eight
days a week trying to get filthy rich shorting what’s left of the American auto industry or
selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and
Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to
you people? Why are we not throwing your ass in jail instead?”
But before you even finish saying that, they’re rolling their eyes, because You Don’t Get
It. These people were never about anything except turning money into money, in order
to get more money; valueswise they’re on par with crack addicts, or obsessive sexual
deviants who burgle homes to steal panties. Yet these are the people in whose hands
our entire political future now rests.
Good luck with that, America. And enjoy tax season.
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The Great American Bubble Machine
By Matt Taibbi
The first thing you need to know about Goldman Sachs is that it's everywhere. The world's
most powerful investment bank is a great vampire squid wrapped around the face of
humanity, relentlessly jamming its blood funnel into anything that smells like money. In
fact, the history of the recent financial crisis, which doubles as a history of the rapid
decline and fall of the suddenly swindled dry American empire, reads like a Who's Who
of Goldman Sachs graduates.
Invasion of the Home Snatchers
By now, most of us know the major players. As George Bush's last Treasury secretary,
former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously selfserving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street.
Robert Rubin, Bill Clinton's former Treasury secretary, spent 26 years at Goldman before
becoming chairman of Citigroup — which in turn got a $300 billion taxpayer bailout from
Paulson. There's John Thain, the asshole chief of Merrill Lynch who bought an $87,000
area rug for his office as his company was imploding; a former Goldman banker, Thain
enjoyed a multi-billion-dollar handout from Paulson, who used billions in taxpayer funds to
help Bank of America rescue Thain's sorry company. And Robert Steel, the former
Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in
golden-parachute payments as his bank was self-destructing. There's Joshua Bolten,
Bush's chief of staff during the bailout, and Mark Patterson, the current Treasury chief of
staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman
director whom Paulson put in charge of bailed-out insurance giant AIG, which forked
over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and
Italian national banks are Goldman alums, as is the head of the World Bank, the head of
the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New
York — which, incidentally, is now in charge of overseeing Goldman — not to mention …
But then, any attempt to construct a narrative around all the former Goldmanites in
influential positions quickly becomes an absurd and pointless exercise, like trying to make
a list of everything. What you need to know is the big picture: If America is circling the
drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate
loophole in the system of Western democratic capitalism, which never foresaw that in a
society governed passively by free markets and free elections, organized greed always
defeats disorganized democracy.
The bank's unprecedented reach and power have enabled it to turn all of America into
a giant pump-and-dump scam, manipulating whole economic sectors for years at a
time, moving the dice game as this or that market collapses, and all the time gorging
itself on the unseen costs that are breaking families everywhere — high gas prices, rising
consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off
bailouts. All that money that you're losing, it's going somewhere, and in both a literal and
a figurative sense, Goldman Sachs is where it's going: The bank is a huge, highly
sophisticated engine for converting the useful, deployed wealth of society into the least
useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.
The Feds vs. Goldman
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They achieve this using the same playbook over and over again. The formula is relatively
simple: Goldman positions itself in the middle of a speculative bubble, selling investments
they know are crap. Then they hoover up vast sums from the middle and lower floors of
society with the aid of a crippled and corrupt state that allows it to rewrite the rules in
exchange for the relative pennies the bank throws at political patronage. Finally, when it
all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire
process over again, riding in to rescue us all by lending us back our own money at
interest, selling themselves as men above greed, just a bunch of really smart guys
keeping the wheels greased. They've been pulling this same stunt over and over since
the 1920s — and now they're preparing to do it again, creating what may be the biggest
and most audacious bubble yet.
If you want to understand how we got into this financial crisis, you have to first
understand where all the money went — and in order to understand that, you need to
understand what Goldman has already gotten away with. It is a history exactly five
bubbles long — including last year's strange and seemingly inexplicable spike in the price
of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed.
But Goldman wasn't one of them.
BUBBLE #1 The Great Depression
Goldman wasn't always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-orbe-killed capitalism on steroids —just almost always. The bank was actually founded in
1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law
Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy
way of saying they made money lending out short-term IOUs to smalltime vendors in
downtown Manhattan.
You can probably guess the basic plotline of Goldman's first 100 years in business: plucky,
immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes
shitloads of money. In that ancient history there's really only one episode that bears
scrutiny now, in light of more recent events: Goldman’s disastrous foray into the
speculative mania of pre-crash Wall Street in the late 1920s.
Wall Street's Big Win
This great Hindenburg of financial history has a few features that might sound familiar.
Back then, the main financial tool used to bilk investors was called an "investment trust."
Similar to modern mutual funds, the trusts took the cash of investors large and small and
(theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the
securities and amounts were often kept hidden from the public. So a regular guy could
invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when
new vehicles like day trading and e-trading attracted reams of new suckers from the
sticks who wanted to feel like big shots, investment trusts roped a new generation of
regular-guy investors into the speculation game.
Beginning a pattern that would repeat itself over and over again, Goldman got into the
investmenttrust game late, then jumped in with both feet and went hogwild. The first
effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at
$100 apiece, bought all those shares with its own money and then sold 90 percent of
them to the hungry public at $104. The trading corporation then relentlessly bought
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shares in itself, bidding the price up further and further. Eventually it dumped part of its
holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more
in shares in that fund — which in turn sponsored yet another trust called the Blue Ridge
Corporation. In this way, each investment trust served as a front for an endless
investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the
7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah —
which, of course, was in large part owned by Goldman Trading.
Taibblog: Commentary on Politics and the Economy by Matt Taibbi
The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money,
one exquisitely vulnerable to a decline in performance anywhere along the line. The
basic idea isn't hard to follow. You take a dollar and borrow nine against it; then you take
that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is
still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no
longer have the money to pay back your investors, and everyone gets massacred.
In a chapter from The Great Crash, 1929 titled "In Goldman Sachs We Trust," the famed
economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as
classic examples of the insanity of leveragebased investment. The trusts, he wrote, were
a major cause of the market's historic crash; in today's dollars, the losses the bank
suffered totaled $475 billion. "It is difficult not to marvel at the imagination which was
implicit in this gargantuan insanity," Galbraith observed, sounding like Keith Olbermann in
an ascot. "If there must be madness, something may be said for having it on a heroic
scale."
BUBBLE #2 Tech Stocks
Fast-forward about 65 years. Goldman not only survived the crash that wiped out so
many of the investors it duped, it went on to become the chief underwriter to the
country's wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who
rose from the rank of janitor's assistant to head the firm, Goldman became the pioneer of
the initial public offering, one of the principal and most lucrative means by which
companies raise money. During the 1970s and 1980s, Goldman may not have been the
planet-eating Death Star of political influence it is today, but it was a top-drawer firm that
had a reputation for attracting the very smartest talent on the Street.
It also, oddly enough, had a reputation for relatively solid ethics and a patient approach
to investment that shunned the fast buck; its executives were trained to adopt the firm's
mantra, "long-term greedy." One former Goldman banker who left the firm in the early
Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it
was a long-term loser. "We gave back money to 'grownup' corporate clients who had
made bad deals with us," he says. "Everything we did was legal and fair — but 'long-term
greedy' said we didn't want to make such a profit at the clients' collective expense that
we spoiled the marketplace."
But then, something happened. It's hard to say what it was exactly; it might have been
the fact that Goldman's cochairman in the early Nineties, Robert Rubin, followed Bill
Clinton to the White House, where he directed the National Economic Council and
eventually became Treasury secretary. While the American media fell in love with the
story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the
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White House, it also nursed an undisguised crush on Rubin, who was hyped as without a
doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein,
Mozart and Kant running far behind.
Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he
had a face that seemed permanently frozen just short of an apology for being so much
smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human
feeling you could imagine him experiencing was a nightmare about being forced to fly
coach. It became almost a national clichè that whatever Rubin thought was best for the
economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the
cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan
under the headline The Committee To Save The World. And "what Rubin thought," mostly,
was that the American economy, and in particular the financial markets, were overregulated and needed to be set free. During his tenure at Treasury, the Clinton White
House made a series of moves that would have drastic consequences for the global
economy — beginning with Rubin's complete and total failure to regulate his
old firm during its first mad dash for obscene short-term profits.
The basic scam in the Internet Age is pretty easy even for the financially illiterate to
grasp. Companies that weren't much more than potfueled ideas scrawled on napkins by
uptoolate bongsmokers were taken public via IPOs, hyped in the media and sold to the
public for mega-millions. It was as if banks like Goldman were wrapping ribbons around
watermelons, tossing them out 50-story windows and opening the phones for bids. In this
game you were a winner only if you took your money out before the melon hit the
pavement.
It sounds obvious now, but what the average investor didn't know at the time was that
the banks had changed the rules of the game, making the deals look better than they
actually were. They did this by setting up what was, in reality, a two-tiered investment
system — one for the insiders who knew the real numbers, and another for the lay
investor who was invited to chase soaring prices the banks themselves knew were
irrational. While Goldman's later pattern would be to capitalize on changes in the
regulatory environment, its key innovation in the Internet years was to abandon its own
industry's standards of quality control.
"Since the Depression, there were strict underwriting guidelines that Wall Street adhered
to when taking a company public," says one prominent hedge-fund manager. "The
company had to be in business for a minimum of five years, and it had to show
profitability for three consecutive years. But Wall Street took these guidelines and threw
them in the trash." Goldman completed the snow job by pumping up the sham stocks:
"Their analysts were out there saying Bullshit.com is worth $100 a share."
The problem was, nobody told investors that the rules had changed. "Everyone on the
inside knew," the manager says. "Bob Rubin sure as hell knew what the underwriting
standards were. They'd been intact since the 1930s."
Jay Ritter, a professor of finance at the University of Florida who specializes in IPOs, says
banks like Goldman knew full well that many of the public offerings they were touting
would never make a dime. "In the early Eighties, the major underwriters insisted on three
years of profitability. Then it was one year, then it was a quarter. By the time of the
Internet bubble, they were not even requiring profitability in the foreseeable future."
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Goldman has denied that it changed its underwriting standards during the Internet years,
but its own statistics belie the claim. Just as it did with the investment trust in the 1920s,
Goldman started slow and finished crazy in the Internet years. After it took a little-known
company with weak financials called Yahoo! public in 1996, once the tech boom had
already begun, Goldman quickly became the IPO king of the Internet era. Of the 24
companies it took public in 1997, a third were losing money at the time of the IPO. In
1999, at the height of the boom, it took 47 companies public, including stillborns like
Webvan and eToys, investment offerings that were in many ways the modern equivalents
of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the
first four months, 14 of which were money losers at the time. As a leading underwriter of
Internet stocks during the boom, Goldman provided profits far more volatile than those
of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its
offering price, compared to the Wall Street average of 181 percent.
How did Goldman achieve such extraordinary results? One answer is that they used a
practice called "laddering," which is just a fancy way of saying they manipulated the
share price of new offerings. Here's how it works: Say you're Goldman Sachs, and
Bullshit.com comes to you and asks you to take their company public. You agree on the
usual terms: You'll price the stock, determine how many shares should be released and
take the Bullshit.com CEO on a "road show" to schmooze investors, all in exchange for a
substantial fee (typically six to seven percent of the amount raised). You then promise
your best clients the right to buy big chunks of the IPO at the low offering price — let's say
Bullshit.com's starting share price is $15 — in exchange for a promise that they will buy
more shares later on the open market. That seemingly simple demand gives you inside
knowledge of the IPO's future, knowledge that wasn't disclosed to the day trader
schmucks who only had the prospectus to go by: You know that certain of your clients
who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25,
virtually guaranteeing that the price is going to go to $25 and beyond. In this way,
Goldman could artificially jack up the new company's price, which of course was to the
bank's benefit — a six percent fee of a $500 million IPO is serious money.
Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of
Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the
attention of Nicholas Maier, the syndicate manager of Cramer & Co., the hedge fund
run at the time by the now-famous chattering television asshole Jim Cramer, himself a
Goldman alum. Maier told the SEC that while working for Cramer between 1996 and
1998, he was repeatedly forced to engage in laddering practices during IPO deals with
Goldman.
"Goldman, from what I witnessed, they were the worst perpetrator," Maier said. "They
totally fueled the bubble. And it's specifically that kind of behavior that has caused the
market crash. They built these stocks upon an illegal foundation — manipulated up —
and ultimately, it really was the small person who ended up buying in." In 2005, Goldman
agreed to pay $40 million for its laddering violations — a puny penalty relative to the
enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it
has settled, refused to respond to questions for this story.)
Another practice Goldman engaged in during the Internet boom was "spinning," better
known as bribery. Here the investment bank would offer the executives of the newly
public company shares at extra-low prices, in exchange for future underwriting business.
Banks that engaged in spinning would then undervalue the initial offering price —
ensuring that those "hot" opening-price shares it had handed out to insiders would be
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more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So
instead of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO
and offer him a million shares of his own company at $18 in exchange for future business
— effectively robbing all of Bullshit's new shareholders by diverting cash that should have
gone to the company's bottom line into the private bank account of the company's
CEO.
In one case, Goldman allegedly gave a multimillion-dollar special offering to eBay CEO
Meg Whitman, who later joined Goldman's board, in exchange for future i-banking
business. According to a report by the House Financial Services Committee in 2002,
Goldman gave special stock offerings to executives in 21 companies that it took public,
including Yahoo! cofounder Jerry Yang and two of the great slithering villains of the
financial-scandal age — Tyco's Dennis Kozlowski and Enron's Ken Lay. Goldman angrily
denounced the report as "an egregious distortion of the facts" — shortly before paying
$110 million to settle an investigation into spinning and other manipulations launched by
New York state regulators. "The spinning of hot IPO shares was not a harmless corporate
perk," then-attorney general Eliot Spitzer said at the time. "Instead, it was an integral part
of a fraudulent scheme to win new investment-banking business."
Such practices conspired to turn the Internet bubble into one of the greatest financial
disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone.
But the real problem wasn't the money that was lost by shareholders, it was the money
gained by investment bankers, who received hefty bonuses for tampering with the
market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet
years demonstrated to bankers that in the age of freely flowing capital and publicly
owned financial companies, bubbles are incredibly easy to inflate, and individual
bonuses are actually bigger when the mania and the irrationality are greater.
Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5
billion in compensation and benefits — an average of roughly $350,000 a year per
employee. Those numbers are important because the key legacy of the Internet boom is
that the economy is now driven in large part by the pursuit of the enormous salaries and
bonuses that such bubbles make possible. Goldman's mantra of "long-term greedy"
vanished into thin air as the game became about getting your check before the melon
hit the pavement.
The market was no longer a rationally managed place to grow real, profitable
businesses: It was a huge ocean of Someone Else's Money where bankers hauled in vast
sums through whatever means necessary and tried to convert that money into bonuses
and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went
bust within a year, so what? By the time the Securities and Exchange Commission got
around to fining your firm $110 million, the yacht you bought with your IPO bonuses was
already six years old. Besides, you were probably out of Goldman by then, running the
U.S. Treasury or maybe the state of New Jersey. (One of the truly comic moments in the
history of America's recent financial collapse came when Gov. Jon Corzine of New
Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened
stock, insisted in 2002 that "I've never even heard the term 'laddering' before.")
For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a
decade late were something far less than a deterrent —they were a joke. Once the
Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven
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strategy; it just searched around for another bubble to inflate. As it turns out, it had one
ready, thanks in large part to Rubin.
BUBBLE #3 The Housing Craze
Goldman's role in the sweeping global disaster that was the housing bubble is not hard to
trace. Here again, the basic trick was a decline in underwriting standards, although in this
case the standards weren't in IPOs but in mortgages. By now almost everyone knows that
for decades mortgage dealers insisted that home buyers be able to produce a down
payment of 10 percent or more, show a steady income and good credit rating, and
possess a real first and last name. Then, at the dawn of the new millennium, they
suddenly threw all that shit out the window and started writing mortgages on the backs
of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.
None of that would have been possible without investment bankers like Goldman, who
created vehicles to package those shitty mortgages and sell them en masse to
unsuspecting insurance companies and pension funds. This created a mass market for
toxic debt that would never have existed before; in the old days, no bank would have
wanted to keep some addict ex-con's mortgage on its books, knowing how likely it was
to fail. You can't write these mortgages, in other words, unless you can sell them to
someone who doesn't know what they are.
Goldman used two methods to hide the mess they were selling. First, they bundled
hundreds of different mortgages into instruments called Collateralized Debt Obligations.
Then they sold investors on the idea that, because a bunch of those mortgages would
turn out to be OK, there was no reason to worry so much about the shitty ones: The CDO,
as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated
investments. Second, to hedge its own bets, Goldman got companies like AIG to provide
insurance — known as credit default swaps — on the CDOs. The swaps were essentially a
racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default,
AIG is betting they won't.
There was only one problem with the deals: All of the wheeling and dealing represented
exactly the kind of dangerous speculation that federal regulators are supposed to rein in.
Derivatives like CDOs and credit swaps had already caused a series of serious financial
calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange
County, California, was forced to default in 1994. A report that year by the Government
Accountability Office recommended that such financial instruments be tightly regulated
— and in 1998, the head of the Commodity Futures Trading Commission, a woman
named Brooksley Born, agreed. That May, she circulated a letter to business leaders and
the Clinton administration suggesting that banks be required to provide greater
disclosure in derivatives trades, and maintain reserves to cushion against losses.
More regulation wasn’t exactly what Goldman had in mind. “The banks go crazy — they
want it stopped,” says Michael Greenberger, who worked for Born as director of trading
and markets at the CFTC and is now a law professor at the University of Maryland.
“Greenspan, Summers, Rubin and [SEC chief Arthur] Levitt want it stopped.”
Clinton's reigning economic foursome — “especially Rubin,” according to Greenberger
— called Born in for a meeting and pleaded their case. She refused to back down,
however, and continued to push for more regulation of the derivatives. Then, in June
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1998, Rubin went public to denounce her move, eventually recommending that
Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session,
Congress passed the now-notorious Commodity Futures Modernization Act, which had
been inserted into an 11,000-page spending bill at the last minute, with almost no
debate on the floor of the Senate. Banks were now free to trade default swaps with
impunity.
But the story didn't end there. AIG, a major purveyor of default swaps, approached the
New York State Insurance Department in 2000 and asked whether default swaps would
be regulated as insurance. At the time, the office was run by one Neil Levin, a former
Goldman vice president, who decided against regulating the swaps. Now freed to
underwrite as many housing-based securities and buy as much credit-default protection
as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom
in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities —
a third of which were sub-prime — much of it to institutional investors like pensions and
insurance companies. And in these massive issues of real estate were vast swamps of
crap.
Take one $494 million issue that year, GSAMP Trust 2006S3. Many of the mortgages
belonged to second-mortgage borrowers, and the average equity they had in their
homes was 0.71 percent. Moreover, 58 percent of the loans included little or no
documentation — no names of the borrowers, no addresses of the homes, just zip codes.
Yet both of the major ratings agencies, Moody's and Standard & Poor's, rated 93 percent
of the issue as investment grade. Moody's projected that less than 10 percent of the
loans would default. In reality, 18 percent of the mortgages were in default within 18
months.
Not that Goldman was personally at any risk. The bank might be taking all these hideous,
completely irresponsible mortgages from beneath-gangster-status firms like Countrywide
and selling them off to municipalities and pensioners — old people, for God's sake —
pretending the whole time that it wasn't grade D horseshit. But even as it was doing so, it
was taking short positions in the same market, in essence betting against the same crap
it was selling. Even worse, Goldman bragged about it in public. "The mortgage sector
continues to be challenged," David Viniar, the bank's chief financial officer, boasted in
2007. "As a result, we took significant markdowns on our long inventory positions …
However, our risk bias in that market was to be short, and that net short position was
profitable." In other words, the mortgages it was selling were for chumps. The real money
was in betting against those same mortgages.
"That's how audacious these assholes are," says one hedge fund manager. "At least with
other banks, you could say that they were just dumb — they believed what they were
selling, and it blew them up. Goldman knew what it was doing."
I ask the manager how it could be that selling something to customers that you're
actually betting against — particularly when you know more about the weaknesses of
those products than the customer — doesn't amount to securities fraud.
"It's exactly securities fraud," he says. "It's the heart of securities fraud."
Eventually, lots of aggrieved investors agreed. In a virtual repeat of the Internet IPO
craze, Goldman was hit with a wave of lawsuits after the collapse of the housing bubble,
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many of which accused the bank of withholding pertinent information about the quality
of the mortgages it issued. New York state regulators are suing Goldman and 25 other
underwriters for selling bundles of crappy Countrywide mortgages to city and state
pension funds, which lost as much as $100 million in the investments. Massachusetts also
investigated Goldman for similar misdeeds, acting on behalf of 714 mortgage holders
who got stuck holding predatory loans. But once again, Goldman got off virtually scotfree, staving off prosecution by agreeing to pay a paltry $60 million — about what the
bank's CDO division made in a day and a half during the real estate boom.
The effects of the housing bubble are well known — it led more or less directly to the
collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps
was in significant part composed of the insurance that banks like Goldman bought
against their own housing portfolios. In fact, at least $13 billion of the taxpayer money
given to AIG in the bailout ultimately went to Goldman, meaning that the bank made
out on the housing bubble twice: It fucked the investors who bought their horseshit CDOs
by betting against its own crappy product, then it turned around and fucked the
taxpayer by making him pay off those same bets.
And once again, while the world was crashing down all around the bank, Goldman
made sure it was doing just fine in the compensation department. In 2006, the firm's
payroll jumped to $16.5 billion — an average of $622,000 per employee. As a Goldman
spokesman explained, "We work very hard here."
But the best was yet to come. While the collapse of the housing bubble sent most of the
financial world fleeing for the exits, or to jail, Goldman boldly doubled down — and
almost single-handedly created yet another bubble, one the world still barely knows the
firm had anything to do with.
BUBBLE #4 $4 a Gallon
By the beginning of 2008, the financial world was in turmoil. Wall Street had spent the
past two and a half decades producing one scandal after another, which didn't leave
much to sell that wasn't tainted. The terms junk bond, IPO, sub-prime mortgage and
other once-hot financial fare were now firmly associated in the public's mind with scams;
the terms credit swaps and CDOs were about to join them. The credit markets were in
crisis, and the mantra that had sustained the fantasy economy throughout the Bush
years — the notion that housing prices never go down — was now a fully exploded myth,
leaving the Street clamoring for a new bullshit paradigm to sling.
Where to go? With the public reluctant to put money in anything that felt like a paper
investment, the Street quietly moved the casino to the physical-commodities market —
stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities,
especially oil. In conjunction with a decline in the dollar, the credit crunch and the
housing crash caused a "flight to commodities." Oil futures in particular skyrocketed, as
the price of a single barrel went from around $60 in the middle of 2007 to a high of $147
in the summer of 2008.
That summer, as the presidential campaign heated up, the accepted explanation for
why gasoline had hit $4.11 a gallon was that there was a problem with the world oil
supply. In a classic example of how Republicans and Democrats respond to crises by
engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending
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the moratorium on offshore drilling would be "very helpful in the short term," while Barack
Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars
was the way out.
But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow
has actually been increasing. In the six months before prices spiked, according to the
U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels
a day to 85.72 million. Over the same period, world oil demand dropped from 86.82
million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the
demand for it was falling — which, in classic economic terms, should have brought prices
at the pump down.
So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had
help — there were other players in the physical commodities market — but the root
cause had almost everything to do with the behavior of a few powerful actors
determined to turn the once-solid market into a speculative casino. Goldman did it by
persuading pension funds and other large institutional investors to invest in oil futures —
agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a
physical commodity, rigidly subject to supply and demand, into something to bet on, like
a stock. Between 2003 and 2008, the amount of speculative money in commodities grew
from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was
traded 27 times, on average, before it was actually delivered and consumed.
As is so often the case, there had been a Depression-era law in place designed
specifically to prevent this sort of thing. The commodities market was designed in large
part to help farmers: A grower concerned about future price drops could enter into a
contract to sell his corn at a certain price for delivery later on, which made him worry less
about building up stores of his crop. When no one was buying corn, the farmer could sell
to a middleman known as a "traditional speculator," who would store the grain and sell it
later, when demand returned. That way, someone was always there to buy from the
farmer, even when the market temporarily had no need for his crops.
In 1936, however, Congress recognized that there should never be more speculators in
the market than real producers and consumers. If that happened, prices would be
affected by something other than supply and demand, and price manipulations would
ensue. A new law empowered the Commodity Futures Trading Commission — the very
same body that would later try and fail to regulate credit swaps — to place limits on
speculative trades in commodities. As a result of the CFTC's oversight, peace and
harmony reigned in the commodities markets for more than 50 years.
All that changed in 1991 when, unbeknownst to almost everyone in the world, a
Goldman-owned commodities-trading subsidiary called J. Aron wrote to the CFTC and
made an unusual argument. Farmers with big stores of corn, Goldman argued, weren't
the only ones who needed to hedge their risk against future price drops — Wall Street
dealers who made big bets on oil prices also needed to hedge their risk, because, well,
they stood to lose a lot too.
This was complete and utter crap — the 1936 law, remember, was specifically designed
to maintain distinctions between people who were buying and selling real tangible stuff
and people who were trading in paper alone. But the CFTC, amazingly, bought
Goldman's argument. It issued the bank a free pass, called the "Bona Fide Hedging"
exemption, allowing Goldman's subsidiary to call itself a physical hedger and escape
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virtually all limits placed on speculators. In the years that followed, the commission would
quietly issue 14 similar exemptions to other companies.
Now Goldman and other banks were free to drive more investors into the commodities
markets, enabling speculators to place increasingly big bets. That 1991 letter from
Goldman more or less directly led to the oil bubble in 2008, when the number of
speculators in the market — driven there by fear of the falling dollar and the housing
crash — finally overwhelmed the real physical suppliers and consumers. By 2008, at least
three quarters of the activity on the commodity exchanges was speculative, according
to a congressional staffer who studied the numbers — and that's likely a conservative
estimate. By the middle of last summer, despite rising supply and a drop in demand, we
were paying $4 a gallon every time we pulled up to the pump.
What is even more amazing is that the letter to Goldman, along with most of the other
trading exemptions, was handed out more or less in secret. "I was the head of the division
of trading and markets, and Brooksley Born was the chair of the CFTC," says
Greenberger, "and neither of us knew this letter was out there." In fact, the letters only
came to light by accident. Last year, a staffer for the House Energy and Commerce
Committee just happened to be at a briefing when officials from the CFTC made an
offhand reference to the exemptions.
"I had been invited to a briefing the commission was holding on energy," the staffer
recounts. "And suddenly in the middle of it, they start saying, 'Yeah, we've been issuing
these letters for years now.' I raised my hand and said, 'Really? You issued a letter? Can I
see it?' And they were like, 'Duh, duh.' So we went back and forth, and finally they said,
'We have to clear it with Goldman Sachs.' I'm like, 'What do you mean, you have to clear
it with Goldman Sachs?'"
The CFTC cited a rule that prohibited it from releasing any information about a
company's current position in the market. But the staffer's request was about a letter that
had been issued 17 years earlier. It no longer had anything to do with Goldman's current
position. What's more, Section 7 of the 1936 commodities law gives Congress the right to
any information it wants from the commission. Still, in a classic example of how complete
Goldman's capture of government is, the CFTC waited until it got clearance from the
bank before it turned the letter over.
Armed with the semi-secret government exemption, Goldman had become the chief
designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index —
which tracks the prices of 24 major commodities but is overwhelmingly weighted toward
oil — became the place where pension funds and insurance companies and other
institutional investors could make massive long-term bets on commodity prices. Which
was all well and good, except for a couple of things. One was that index speculators are
mostly "long only" bettors, who seldom if ever take short positions — meaning they only
bet on prices to rise. While this kind of behavior is good for a stock market, it's terrible for
commodities, because it continually forces prices upward. "If index speculators took short
positions as well as long ones, you'd see them pushing prices both up and down," says
Michael Masters, a hedge fund manager who has helped expose the role of investment
banks in the manipulation of oil prices. "But they only push prices in one direction: up."
Complicating matters even further was the fact that Goldman itself was cheerleading
with all its might for an increase in oil prices. In the beginning of 2008, Arjun Murti, a
Goldman analyst, hailed as an "oracle of oil" by The New York Times, predicted a "super
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spike" in oil prices, forecasting a rise to $200 a barrel. At the time Goldman was heavily
invested in oil through its commodities trading subsidiary, J. Aron; it also owned a stake in
a major oil refinery in Kansas, where it warehoused the crude it bought and sold. Even
though the supply of oil was keeping pace with demand, Murti continually warned of
disruptions to the world oil supply, going so far as to broadcast the fact that he owned
two hybrid cars. High prices, the bank insisted, were somehow the fault of the piggish
American consumer; in 2005, Goldman analysts insisted that we wouldn't know when oil
prices would fall until we knew "when American consumers will stop buying gas-guzzling
sport utility vehicles and instead seek fuel-efficient alternatives."
But it wasn't the consumption of real oil that was driving up prices — it was the trade in
paper oil. By the summer of 2008, in fact, commodities speculators had bought and
stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that
speculators owned more future oil on paper than there was real, physical oil stored in all
of the country's commercial storage tanks and the Strategic Petroleum Reserve
combined. It was a repeat of both the Internet craze and the housing bubble, when Wall
Street jacked up present-day profits by selling suckers shares of a fictional fantasy future
of endlessly rising prices.
In what was by now a painfully familiar pattern, the oil-commodities melon hit the
pavement hard in the summer of 2008, causing a massive loss of wealth; crude prices
plunged from $147 to $33. Once again the big losers were ordinary people. The
pensioners whose funds invested in this crap got massacred: CalPERS, the California
Public Employees' Retirement System, had $1.1 billion in commodities when the crash
came. And the damage didn't just come from oil. Soaring food prices driven by the
commodities bubble led to catastrophes across the planet, forcing an estimated 100
million people into hunger and sparking food riots throughout the Third World.
Now oil prices are rising again: They shot up 20 percent in the month of May and have
nearly doubled so far this year. Once again, the problem is not supply or demand. "The
highest supply of oil in the last 20 years is now," says Rep. Bart Stupak, a Democrat from
Michigan who serves on the House energy committee. "Demand is at a 10-year low. And
yet prices are up."
Asked why politicians continue to harp on things like drilling or hybrid cars, when supply
and demand have nothing to do with the high prices, Stupak shakes his head. "I think
they just don't understand the problem very well," he says. "You can't explain it in 30
seconds, so politicians ignore it."
BUBBLE #5 Rigging the Bailout
After the oil bubble collapsed last fall, there was no new bubble to keep things humming
— this time, the money seems to be really gone, like worldwide-depression gone. So the
financial safari has moved elsewhere, and the big game in the hunt has become the
only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money.
Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its
muscle.
It began in September of last year, when then-Treasury secretary Paulson made a
momentous series of decisions. Although he had already engineered a rescue of Bear
Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and
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Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman's last real
competitors — collapse without intervention. ("Goldman's superhero status was left
intact," says market analyst Eric Salzman, "and an investment banking competitor,
Lehman, goes away.") The very next day, Paulson green-lighted a massive, $85 billion
bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman.
Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By
contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50
cents for every dollar they are owed.
Immediately after the AIG bailout, Paulson announced his federal bailout for the
financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a
heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of
administering the funds. In order to qualify for bailout monies, Goldman announced that
it would convert from an investment bank to a bank holding company, a move that
allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less
conspicuous, publicly backed funding — most notably, lending from the discount
window of the Federal Reserve. By the end of March, the Fed will have lent or
guaranteed at least $8.7 trillion under a series of new bailout programs — and thanks to
an obscure law allowing the Fed to block most congressional audits, both the amounts
and the recipients of the monies remain almost entirely secret.
Converting to a bank-holding company has other benefits as well: Goldman's primary
supervisor is now the New York Fed, whose chairman at the time of its announcement
was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was
technically in violation of Federal Reserve policy by remaining on the board of Goldman
even as he was supposedly regulating the bank; in order to rectify the problem, he
applied for, and got, a conflict of interest waiver from the government. Friedman was
also supposed to divest himself of his Goldman stock after Goldman became a bank
holding company, but thanks to the waiver, he was allowed to go out and buy
52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped
down in May, but the man now in charge of supervising Goldman — New York Fed
president William Dudley — is yet another former Goldmanite.
The collective message of all this — the AIG bailout, the swift approval for its bank
holding conversion, the TARP funds — is that when it comes to Goldman Sachs, there isn't
a free market at all. The government might let other players on the market die, but it
simply will not allow Goldman to fail under any circumstances. Its edge in the market has
suddenly become an open declaration of supreme privilege. "In the past it was an
implicit advantage," says Simon Johnson, an economics professor at MIT and former
official at the International Monetary Fund, who compares the bailout to the crony
capitalism he has seen in Third World countries. "Now it's more of an explicit advantage."
Once the bailouts were in place, Goldman went right back to business as usual,
dreaming up impossibly convoluted schemes to pick the American carcass clean of its
loose capital. One of its first moves in the post-bailout era was to quietly push forward the
calendar it uses to report its earnings, essentially wiping December 2008 — with its $1.3
billion in pretax losses — off the books. At the same time, the bank announced a highly
suspicious $1.8 billion profit for the first quarter of 2009 — which apparently included a
large chunk of money funneled to it by taxpayers via the AIG bailout. "They cooked
those first quarter results six ways from Sunday," says one hedge fund manager. "They hid
the losses in the orphan month and called the bailout money profit."
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Two more numbers stand out from that stunning first-quarter turnaround. The bank paid
out an astonishing $4.7 billion in bonuses and compensation in the first three months of
this year, an 18 percent increase over the first quarter of 2008. It also raised $5 billion by
issuing new shares almost immediately after releasing its first quarter results. Taken
together, the numbers show that Goldman essentially borrowed a $5 billion salary payout
for its executives in the middle of the global economic crisis it helped cause, using halfbaked accounting to reel in investors, just months after receiving billions in a taxpayer
bailout.
Even more amazing, Goldman did it all right before the government announced the
results of its new "stress test" for banks seeking to repay TARP money — suggesting that
Goldman knew exactly what was coming. The government was trying to carefully
orchestrate the repayments in an effort to prevent further trouble at banks that couldn't
pay back the money right away. But Goldman blew off those concerns, brazenly
flaunting its insider status. "They seemed to know everything that they needed to do
before the stress test came out, unlike everyone else, who had to wait until after," says
Michael Hecht, a managing director of JMP Securities. "The government came out and
said, 'To pay back TARP, you have to issue debt of at least five years that is not insured by
FDIC — which Goldman Sachs had already done, a week or two before."
And here's the real punch line. After playing an intimate role in four historic bubble
catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after
pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive
the price of gas up to $4 a gallon and to push 100 million people around the world into
hunger, after securing tens of billions of taxpayer dollars through a series of bailouts
overseen by its former CEO, what did Goldman Sachs give back to the people of the
United States in 2008?
Fourteen million dollars.
That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it,
one percent. The bank paid out $10 billion in compensation and benefits that same year
and made a profit of more than $2 billion — yet it paid the Treasury less than a third of
what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year.
How is this possible? According to Goldman's annual report, the low taxes are due in
large part to changes in the bank's "geographic earnings mix." In other words, the bank
moved its money around so that most of its earnings took place in foreign countries with
low tax rates. Thanks to our completely fucked corporate tax system, companies like
Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely,
even while they claim deductions upfront on that same untaxed income. This is why any
corporation with an at least occasionally sober accountant can usually find a way to
zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly twothirds of all corporations operating in the U.S. paid no taxes at all.
This should be a pitchfork-level outrage — but somehow, when Goldman released its
post-bailout tax profile, hardly anyone said a word. One of the few to remark on the
obscenity was Rep. Lloyd Doggett, a Democrat from Texas who serves on the House
Ways and Means Committee. "With the right hand out begging for bailout money," he
said, "the left is hiding it offshore."
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BUBBLE #6 Global Warming
Fast-forward to today. It's early June in Washington, D.C. Barack Obama, a popular
young politician whose leading private campaign donor was an investment bank called
Goldman Sachs — its employees paid some $981,000 to his campaign — sits in the White
House. Having seamlessly navigated the political minefield of the bailout era, Goldman is
once again back to its old business, scouting out loopholes in a new governmentcreated market with the aid of a new set of alumni occupying key government jobs.
Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark
Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm's
co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed
CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion
dollar market that barely even exists yet, but will if the Democratic Party that it gave
$4,452,585 to in the last election manages to push into existence a groundbreaking new
commodities bubble, disguised as an "environmental plan," called cap-and-trade.
The new carbon credit market is a virtual repeat of the commodities-market casino that's
been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward
as expected, the rise in prices will be government-mandated. Goldman won't even have
to rig the game. It will be rigged in advance.
Here's how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas
distributors and numerous other industries on the amount of carbon emissions (a.k.a.
greenhouse gases) they can produce per year. If the companies go over their allotment,
they will be able to buy "allocations" or credits from other companies that have
managed to produce fewer emissions. President Obama conservatively estimates that
about $646 billion worth of carbon credits will be auctioned in the first seven years; one
of his top economic aides speculates that the real number might be twice or even three
times that amount.
The feature of this plan that has special appeal to speculators is that the "cap" on carbon
will be continually lowered by the government, which means that carbon credits will
become more and more scarce with each passing year. Which means that this is a
brand new commodities market where the main commodity to be traded is guaranteed
to rise in price over time. The volume of this new market will be upwards of a trillion dollars
annually; for comparison's sake, the annual combined revenues of all electricity suppliers
in the U.S. total $320 billion.
Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting
legislation, (2) make sure that they're the profit-making slice of that paradigm and (3)
make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long
ago, but things really ramped up last year when the firm spent $3.5 million to lobby
climate issues. (One of their lobbyists at the time was none other than Patterson, now
Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he
personally helped author the bank's environmental policy, a document that contains
some surprising elements for a firm that in all other areas has been consistently opposed
to any sort of government regulation. Paulson's report argued that "voluntary action
alone cannot solve the climate change problem." A few years later, the bank's carbon
chief, Ken Newcombe, insisted that cap-and-trade alone won't be enough to fix the
climate problem and called for further public investments in research and development.
Which is convenient, considering that Goldman made early investments in wind power (it
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bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a
firm called Changing World Technologies) and solar power (it partnered with BP Solar),
exactly the kind of deals that will prosper if the government forces energy producers to
use cleaner energy. As Paulson said at the time, "We're not making those investments to
lose money."
The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon
credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a
Utah-based firm that sells carbon credits of the type that will be in great demand if the
bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of
cap-and-trade, started up a company called Generation Investment Management with
three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark
Ferguson and Peter Harris. Their business? Investing in carbon offsets. There's also a $500
million Green Growth Fund set up by a Goldmanite to invest in green-tech … the list goes
on and on. Goldman is ahead of the headlines again, just waiting for someone to make
it rain in the right spot. Will this market be bigger than the energy futures market?
"Oh, it'll dwarf it," says a former staffer on the House energy committee.
Well, you might say, who cares? If cap-and-trade succeeds, won't we all be saved from
the catastrophe of global warming? Maybe — but cap-and-trade, as envisioned by
Goldman, is really just a carbon tax structured so that private interests collect the
revenues. Instead of simply imposing a fixed government levy on carbon pollution and
forcing unclean energy producers to pay for the mess they make, cap-and-trade will
allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities
market into a private tax collection scheme. This is worse than the bailout: It allows the
bank to seize taxpayer money before it's even collected.
"If it's going to be a tax, I would prefer that Washington set the tax and collect it," says
Michael Masters, the hedge fund director who spoke out against oil futures speculation.
"But we're saying that Wall Street can set the tax, and Wall Street can collect the tax.
That's the last thing in the world I want. It's just asinine."
Cap-and-trade is going to happen. Or, if it doesn't, something like it will. The moral is the
same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In
almost every case, the very same bank that behaved recklessly for years, weighing down
the system with toxic loans and predatory debt, and accomplishing nothing but massive
bonuses for a few bosses, has been rewarded with mountains of virtually free money and
government guarantees — while the actual victims in this mess, ordinary taxpayers, are
the ones paying for it.
It's not always easy to accept the reality of what we now routinely allow these people to
get away with; there's a kind of collective denial that kicks in when a country goes
through what America has gone through lately, when a people lose as much prestige
and status as we have in the past few years. You can't really register the fact that you're
no longer a citizen of a thriving first-world democracy, that you're no longer above
getting robbed in broad daylight, because like an amputee, you can still sort of feel
things that are no longer there.
But this is it. This is the world we live in now. And in this world, some of us have to play by
the rules, while others get a note from the principal excusing them from homework till the
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end of time, plus 10 billion free dollars in a paper bag to buy lunch. It's a gangster state,
running on gangster economics, and even prices can't be trusted anymore; there are
hidden taxes in every buck you pay. And maybe we can't stop it, but we should at least
know where it's all going.
This article originally appeared in the July 9-23, 2009 of Rolling Stone.
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