Search Results for: Capital New York

The Big Problem with Financial Journalism

One great problem with financial journalism, especially in the decades leading up to the crash, has been that it’s often written in an argot understandable only to the already highly financially literate. Andrew Ross Sorkin doesn’t usually employ such specialized language. This has led to the mistaken belief that he’s explaining the industry to regular people. In fact, he is a dutiful Wall Street court reporter, telling important people what other important people are thinking and saying. At the same time, he is Wall Street’s most valuable flack. He isn’t explaining finance to the people—you’d be better served reading John Kenneth Galbraith to understand how finance works—he’s justifying it.

The modern finance industry is at a loss when it comes to justifying its own existence. Its finest minds can’t explain why we wouldn’t be better off with a much simpler and more heavily circumscribed model of capital formation. Sorkin likewise can’t make his readers fully grasp why the current system—which turns large amounts of other people’s money and even more people’s debt into huge paper fortunes for a small super-elite, and in such a way as to regularly imperil the entire worldwide economic order—is beneficial or necessary. But the New York Times and Wall Street each need him to try.

Alex Pareene, in The Baffler (2014).

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Photo via Wikimedia Commons

David Foster Wallace and the Nature of Fact

Josh Roiland | Literary Journalism Studies | Fall 2013 | 23 minutes (5,690 words)

Josh Roiland is an Assistant Professor in the Department of Communication & Journalism and a CLAS-Honors Preceptor in the Honors College at the University of Maine. Roiland is a cultural historian of the American news media, who researches and teaches classes on the cultural, political, and literary significance of American journalism. This piece originally appeared in the Fall 2013 issue of Literary Journalism Studies. Our thanks to Roiland for allowing us to reprint it here, and for adding this introduction:

David Foster Wallace saw clear lines between journalists and novelists who write nonfiction, and he wrestled throughout his career with whether a different set of rules applied to the latter category. In the years after his death, he has faced charges of embellishment and exaggeration by his close friend Jonathan Franzen and repeated by his biographer D.T. Max. Their criticisms, however, do not adequately address the intricate philosophy Wallace formulated about genre classification and the fact/fiction divide. This article explores those nuances and argues that Wallace’s thinking about genre was complex, multifaceted, and that it evolved during his writing life.

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Before he sat down with the best tennis player on the planet for a noonday interview in the middle of the 2006 Wimbledon fortnight, David Foster Wallace prepared a script. Atop a notebook page he wrote, “R.Federer Interview Qs.” and below he jotted in very fine print 13 questions. After three innocuous ice breakers, Wallace turned his attention to perhaps the most prominent theme in all his writing: consciousness. Acknowledging the abnormal interview approach, Wallace prefaced these next nine inquires with a printed subhead: “Non-Journalist Questions.” Each interrogation is a paragraph long, filled with digressions, asides, and qualifications; several contain superscripted addendums.  In short, they read like they’re written by David Foster Wallace. He asks Roger Federer if he’s aware of his own greatness, aware of the unceasing media microscope he operates under, aware of his uncommon elevation of athletics to the level of aesthetics, aware of how great his great shots really are. Wallace even wrote, “How aware are you of the ballboys?” before crossing the question out.

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How to Write About Tax Havens and the Super-Rich: An Interview with Nicholas Shaxson

I met Nicholas Shaxson last summer at a gay barbecue in Berlin. Shaxson isn’t gay, but he’s the kind of dude who will rock up at a gay barbecue, wife and child in tow, and unself-consciously eat sausage and ribs with the inverts. We discovered, lounging on a blanket, that we both work for small NGOs, live in Berlin, and dabble in journalism. And we both work on issues (me: corporate human rights violations; him: tax havens) that the rest of the world manages to ignore for most of their day.

Last year Shaxson published a Vanity Fair article, “A Tale of Two Londons,” that described the residents of one of London’s most exclusive addresses—One Hyde Park—and the accounting acrobatics they had performed to get there.

Here’s how it works: If you’re a Russian oil billionaire or a Nigerian bureaucro-baron and you want to hide some of your money from national taxes and local scrutiny, London real estate is a great place to stash it. All you need to do is establish a holding company, park it offshore and get a-buying. Here’s Shaxson:

These buyers use offshore companies for three big and related reasons: tax, secrecy, and “asset protection.” A property owned outright becomes subject to various British taxes, particularly capital-gains and taxes on transfers of ownership. But properties held through offshore companies can often avoid these taxes. According to London lawyers, the big reason for using these structures has been to avoid inheritance taxes. […]

But secrecy, for many, is at least as important: once a foreign investor has avoided British taxes, then offshore secrecy gives him the opportunity to avoid scrutiny from his own country’s tax—or criminal—authorities too. Others use offshore structures for “asset protection”—frequently, to avoid angry creditors. That seems to be the case with a company called Postlake Ltd.—registered on the Isle of Man—which owns a $5.6 million apartment on the fourth floor [of One Hyde Park].

Shaxson argues that this phenomenon has taken over the U.K. real estate market—extortionate penthouses for the ultrarich sitting empty while the rest of us outbid each other for the froth below.

Shaxson’s piece was one of the best long-form pieces I read last year (I did in fact believe this before I met him, but you can take that with a grain of salt if you’d like), and last week I asked Shaxson to sit down with me for a proper conversation about how the story came about and whether it achieved what he wanted.

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The Bohemians: The San Francisco Writers Who Reinvented American Literature

Ben Tarnoff | The Bohemians, Penguin Press | March 2014 | 46 minutes (11,380 words)

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For our Longreads Member Pick, we’re thrilled to share the opening chapter of The Bohemians: Mark Twain and the San Francisco Writers Who Reinvented American Literature, the book by Ben Tarnoff, published by The Penguin Press. Read more…

My Tears See More Than My Eyes: My Son’s Depression and the Power of Art

Alan Shapiro | Virginia Quarterly Review| Fall 2006 | 20 minutes (4,928 words)

Alan Shapiro published two books in January 2012: Broadway Baby, a novel, from Algonquin Books, and Night of the Republic, poetry, from Houghton Mifflin/Harcourt. This essay first appeared in the Virginia Quarterly Review (subscribe here). Our thanks to Shapiro for allowing us to reprint it here, and for sharing an update on Nat’s life (see the postscript below).

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Longreads Best of 2013: 22 Outstanding Book Chapters We Featured This Year

This year we featured not only the best stories from the web, but also great chapters from new and classic books. Here’s a complete guide to every book chapter we featured this year, both for free and for Longreads Members: Read more…

Longreads Best of 2013: Most Urgent Story, Award for Outstanding Reporting

Taken

Sarah Stillman | The New Yorker | August 2013 | 45 minutes (11,405 words)

Raphael Pope-Sussman (@AudacityofPope) is the managing editor of News Genius and a founding co-editor of BKLYNR.

Sarah Stillman’s story describes the use of civil forfeiture, a process by which the state can confiscate individuals’ assets with no due process. I chose this story because it sheds light on a fundamental injustice in our judicial system—one of many ways in which this system has been perverted to deny of basic rights and disenfranchise those who lack substantial financial or social capital. And it’s beautifully told. You can’t ask for more in a long-form story.

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Eva Holland (@evaholland) is a freelance writer and editor based in Canada’s Yukon Territory.

I continue to be amazed by Sarah Stillman’s reporting. In “Taken,” she tackles civil forfeiture, an obscure and seemingly dry legal loophole that has enormous implications for police abuse. The story is thorough and compelling, and left me feeling, suddenly, like a topic I’d never heard of before I sat down to read it was an urgent matter, a serious public concern. That’s journalism at its best.

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‘Quebrado’: The Life and Death of a Young Activist

Illustration by Kjell Reigstad

Jeff Sharlet | Sweet Heaven When I Die, W. W. Norton & Company | Aug 2011 | 37 minutes (9,133 words)

 

Our latest Longreads Member Pick is “Quebrado,” by Jeff Sharlet, a professor at Dartmouth, contributing editor for Rolling Stone and bestselling author. The story was first published in Rolling Stone in 2008 and is featured in Sharlet’s book Sweet Heaven When I Die. Thanks to Sharlet for sharing it with the Longreads community. Read more…

The Making of McKinsey: A Brief History of Management Consulting in America

Duff McDonald | The Firm, Simon & Schuster | 2013 | 12 minutes (3,000 words)

 

The American Century

In 1941 Time Inc. publisher Henry Luce coined the term “American Century” in a Life magazine editorial. He was describing the country’s global economic and political dominance leading up to World War II. But Luce was also correct in the literal sense: The American Century had actually started several decades before.

The building of the railroads and coincident spread of the telegraph in the United States in the middle and second half of the nineteenth century helped create the world’s first truly “mass” markets. If an executive had ambition, his company didn’t have to serve just local customers. It could serve an entire continent and beyond, if it had the wherewithal to get the organization and logistics right.

The economic historian Alfred Chandler documented the momentous changes in what came to be known as the Second Industrial Revolution in his seminal book Scale and Scope—the title of which referred to the simultaneous revolutions in both scale (in manufacture) and scope (in distribution) in American enterprise. Those twin revolutions transformed the United States from an agrarian society to an industrial powerhouse in the span of a single generation. In 1870 the nation accounted for 23 percent of the world’s industrial production. By 1913 that proportion had jumped to 36 percent, exceeding that of Great Britain.

By 1920, when only a third of homes in the country had electricity and only one in five had a flush toilet, the country’s business establishment was embarking on a course of radical, unprecedented expansion. This brought with it a dilemma that has preoccupied business leaders ever since: how to grow big while maintaining control over the enterprise. Moving from a single-product, owner-run enterprise into a complex and large-scale national one is a difficult task. First, you have to build production facilities massive enough to achieve the desired economies of scale. Second, you have to invest in a national marketing and distribution effort to ensure that sales have a chance of matching that scaled-up production. And third, you have to hire, train, and trust people to administer your business. Those people are called managers, and in the first half of the American Century, they were in very short supply.

The benefits to successful first-movers were gigantic. In industries where only one or two companies took the plunge early, they dominated their field for a very long time to come; this group includes well-known names like Heinz, Campbell Soup, and Westinghouse. A ten-year merger mania, from 1895 through 1904, also brought the creation of a number of corporate entities the likes of which the world had never seen—1,800 companies were crunched into 157 megacorporations, including stalwarts like U.S. Steel, American Cotton, National Biscuit, American Tobacco, General Electric, and AT&T.

The key business problem identified during this transition—and one that underwrote McKinsey’s success for several decades—was that a single, central office could no longer adequately administer such far-flung empires. Power had to be ceded to the extremities. The question was how. It was a quandary that beguiled some of the great thinkers of the time, including political scientist Max Weber, who argued that a systematic approach to marshaling resources through bureaucracy was a necessary and profound improvement over pure charismatic leadership.

In his book American Business, 1920–2000: How It Worked, Harvard professor Thomas McCraw pinpointed the issue: “In the running of a company of whatever size, the hardest thing to manage is usually this: the delicate balance between the necessity for centralized control and the equally strong need for employees to have enough autonomy to make maximum contributions to the company and derive satisfaction from their work. To put it another way, the problem is exactly where within the company to lodge the power to make different kinds of decisions.”

Companies such as DuPont, General Motors, and Sears Roebuck were the first to address this problem systematically. According to Chandler, DuPont sent an emissary to four other companies experiencing similar issues—the meatpackers Armour and Wilson and Company, International Harvester, and Westinghouse Electric—to ask what they were doing. And the answers were remarkably similar: The innovators moved from the centralized system to a multidivisional structure with product and geographic breakdowns. The concept left operating division chiefs with total control over everything except funding resources. Top managers took a more universal view of the business, monitoring the divisions and allocating capital accordingly.

The most successful companies of the era, such as General Electric, Standard Oil, and U.S. Steel, all employed some variant of this model. But by and large, they had developed these ideas on their own, a process of trial and error that was costly and time consuming. They would have much preferred hiring outside experts to help them with it, if only such experts existed. This was a huge commercial opportunity that called for an entirely new kind of service.

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Stepping into the Breach

Unwittingly, the federal government did its part to create the modern consulting business. Starting in the last part of the nineteenth century, Washington made periodic regulatory efforts to curb the power of big business, including the 1890 Sherman Antitrust Act, the Federal Trade Commission Act and Clayton Act of 1914, and the Glass-Steagall Act of 1933. The intended effect of these measures was to prevent corporations from colluding with one another to fix prices and otherwise manipulate the markets. The unintended effect, according to historian Christopher McKenna, was to accelerate the creation of an informal—but legal—way of sharing information among oligopolists. Who could do that? Consultants.

Regulatory efforts paid another rich benefit to the likes of McKinsey: Restricted from cutting backroom deals with each other, firms were thus obliged to actually compete, which meant they needed to make their operations more efficient. Here again, consultants were the answer.

But perhaps the circumstance that most aided the creation of the consulting industry was the entry of a new, key player into business itself. Empire builders with names like Carnegie, Duke, Ford, and Rockefeller had built huge, vertically integrated companies, but they had neither the time, the talent, nor the inclination to create and carry out management systems for those entities. These were the conquerors of capitalism, not its administrators. And yet, as Chandler pointed out, “their strategies of expansion, consolidation, and integration demanded structural changes and innovations at all levels of administration.”

Into the breach stepped a new economic actor who was neither capital nor labor: the professional manager. Gradually, he replaced the robber baron as the steward of American business. Alfred P. Sloan, the legendary president of General Motors, was the first nonowner to become truly famous for his managing skills. His decentralized, multidivisional management structure gave GM the agility to outmaneuver the more plodding Ford Motor Company and snatch the industry lead. Ford may have revolutionized manufacturing, but Sloan realized that the car-buying market had become big enough to be segmented into people who bought Buicks, Cadillacs, Chevrolets, Oldsmobiles, and Pontiacs. By the late 1920s, the car market was maturing, and people wanted choice. Sloan also gave them the ability to buy a car on credit—a groundbreaking idea at the time. Before the decade was over, GM had surpassed Ford as the market share leader, a position it didn’t relinquish until the 1980s.

Sloan and his ilk were perfect customers for McKinsey: Lacking the legitimization of actual ownership, professional managers felt great pressure to show they were using cutting-edge practices. And who better to bring those practices to their attention than consultants who were talking to everyone else? This was the beginning of a decades-long separation of ownership from control in corporate America, and the consultant was an able ally to the professional manager in this tug-of-war—an ally who wasn’t gunning for the manager’s job. Thus began the era of managerial capitalism.

For more than two centuries, economists had argued that companies operated in some sense at the mercy of Adam Smith’s “invisible hand” of the market. But the revolution in management thinking in the United States offered up an alternative idea: the “visible hand” of management, which made things happen, as opposed to merely responding to external market forces.

The academy helped move this ideology along. Before 1900, there was only one undergraduate business school in the country, the University of Pennsylvania’s Wharton School of Finance and Economy, founded in 1881 with a $100,000 donation from financier Joseph Wharton. The Tuck School of Business at Dartmouth followed in 1900. Over the next decade, pretty much every major institution started explicitly preparing its students for careers in management.

Although the rise of today’s industrial-farm-style MBA programs is really a postwar phenomenon, Harvard founded its Graduate School of Business Administration in 1908, with a second-year business policy course designed to give the student an integrative approach to addressing business problems, including accounting, operations, and finance. The purpose of the course, according to the school, was to give the student an ability to see those problems from the top management point of view. Much of James McKinsey’s academic writing centered on this very issue and later informed the practice of his firm.

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McKinsey’s Oeuvre

As a young academic, McKinsey was a prolific writer, if not an especially engaging one. His first four books were dry tomes on the nitty-gritty of accounting and taxes: Federal Incomes and Excess Profits Tax Laws (1918), Principles of Accounting (cowritten with A. C. Hodges, 1920), Bookkeeping and Accounting (1921), and Financial Management (1922). But with his fifth effort, he broadened his horizons significantly. Budgetary Control (1922)—the first definitive work on budgeting—turned accounting on its head, promoting it as an essential tool of managerial decision making. “Budgetary control involves the following,” McKinsey wrote. “1. The statement of the plans of all the departments of the business for a certain period of time in the form of estimates. 2. The coordination of these estimates into a well-balanced program for the business as a whole. 3. The preparation of reports showing a comparison between the actual and the estimated performance, and the revision of the original plans when these reports show that such a revision is necessary.”

It seems commonsensical, but McKinsey’s new way of looking at the use of the budgeting process sparked nothing short of a revolution. “No other mechanism of management of similar scope and complexity has ever been introduced so rapidly,” wrote one commentator just ten years later. “It is estimated that 80 percent of budgets installed in industry have been put in since 1922.”

Up to that point, budgeting was a one-way exercise: Accountants added up all of a firm’s expenses and then tossed in a sales projection almost as an afterthought. In McKinsey’s view, companies should start by developing their business plan, figure out how to achieve it, and then estimate the costs of doing so. In this new context, budgeting wasn’t just a ledger activity; it could also be used to identify excellence in performance (i.e., those who outperform their budget), to spot weaknesses (those who underperform), and to take corrective action. “[While] there are many who do not yet plan scientifically … ,” he wrote, “there are few who will deny the merits of the system.”

Two subsequent books fleshed out McKinsey’s ideas: 1924’s Managerial Accounting and Business Administration. The former taught students how accounting data could be used to solve business problems. Using the data of traditional recordkeeping, he suggested the possibility for much greater control over a company’s destiny, including the establishment of standard procedures (how things should be done and to whom information should be reported), financial standards (ways to judge operating efficiency), and operating standards (including nonfinancial measures, such as quality). To today’s business student, this kind of comprehensiveness seems obvious. But at the time, the idea of planning, directing, controlling, and improving decision making by means of regular and rigorous reporting of company results was novel. The latter book contained the seeds of McKinsey’s General Survey Outline—a thirty-page system for understanding a company in its entirety, from finances to organization to competitive positioning. It became part of his consultants’ toolkit sometime in the early 1930s.

It is hard to overestimate the impact of the General Survey Outline (GSO). It served as the foundation of his approach to understanding a company and provided novice consultants with a clear road map to do so themselves. The survey also shaped consultants’ thinking: The emphasis in the GSO was more on whymanagers did things, as opposed to how they did them. Using the GSO, consultants started every engagement by thinking of the outlook for the industry of their client, the place of the client in the industry, the effectiveness of management, the state of its finances, and favorable or unfavorable factors that might affect the future of the firm. No detail was too small to take note of, whether it was a study of all firm policies—including sales,production, purchasing, financial, and personnel—or an analysis of whether the layout of equipment in a company’s plant provided for the most efficient flow of the production operations. By the time the young consultant had completed the survey for his client, he knew the company and its business cold.

“You can see McKinsey’s intellectual development,” says John Neukom, who worked at McKinsey from 1934 to the early 1970s and wrote a brief memoir of his time at the firm. “He had lost interest in the details of accounting. By the time I arrived, he had lost interest in the budgetary procedure and was now excited and interested in analyzing companies and seeing how companies worked. He was clearly diagnosing the total problems of the company.” In a 1925 speech at a conference for financial executives in New York, McKinsey offered the kind of pointed insight for which he is remembered: “Usually, I find that the executive who says he does not believe in an organization chart does not want to prepare one because he does not wish other people to know that he had not yet thought through his organization properly. For the same reason many men are opposed to budgets. They are unwilling for anyone to see how little they have thought about what they are going to do in future periods.”

Armed with that insight—and the general philosophy that management can shape a company’s destiny—he decided to set up shop and sell it.

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Bastards Require No Diplomacy

In the mid-1920s, McKinsey began doing business under the banner of James O. McKinsey and Company, Accountants and Management Engineers, the progenitor of the modern-day McKinsey & Company. Strangely for a company that prides itself on getting the details right, the actual date of its founding is unknown—a firm training manual from 1937 suggests 1924, while John Neukom’s memoir says 1925. Whichever it was, McKinsey’s timing was excellent. The economy was booming, and the need for consulting services was seemingly endless.

It is worth noting that the word “consultant” was not in the name of his firm. Rather, the term “management engineers” reflected the prevailing ethos of the time: that science held the answers to most serious questions, and even human commerce could profit from the rigors of this kind of data-driven analysis. McKinsey’s standard working pads have always been crosshatched graph paper, another nod to engineering. The fact that McKinsey himself employed no actual engineers was beside the point.

Intellectual underpinnings aside, the firm’s real-world roots were in red meat. McKinsey’s first client was Armour & Company, one of the country’s largest meatpackers. The treasurer of Armour had read Budgetary Control and wanted McKinsey to help rethink the meatpacker’s approach to budgeting and planning.

The first partner McKinsey brought on board was A. Tom Kearney, who had been director of research at Swift & Company, another Chicago meatpacker. Kearney was a warmer, more congenial complement to McKinsey’s formal and pointed demeanor. Another early partner was William Hemphill, the same treasurer of Armour who had hired McKinsey in the first place.

McKinsey continued to teach at the University of Chicago for a time, but he eventually switched full-time to the firm. One reason he seems to have juggled so many responsibilities is that he didn’t waste time with niceties at the office. In Hal Higdon’s 1970 history of consulting, The Business Healers, one associate recalled him saying: “I have to be diplomatic with our clients. But I don’t have to be diplomatic with you bastards.”(Marvin Bower later modeled his own approach to constructive criticism after McKinsey’s tough love approach.)

McKinsey was blunt, but he was also a quick and agile thinker. He once diagnosed a client’s problems just by looking at the company’s letterhead. A Midwestern maker of air conditioners had stationery that announced “Industrial Air Conditioning Installations—Coast to Coast from Canada to Mexico.” In an era before salespeople traveled by airline, McKinsey observed that travel expenses were probably eating up the majority of the company’s profits and that employees should confine themselves to a radius of five hundred miles around Chicago. He was right.

Even the Depression couldn’t stop the growth of the firm. By 1930, McKinsey’s professional staff totaled fifteen. In 1931 he drafted the General Survey Outline, and the next year he opened a New York outpost in the offices of a defunct investment house at 52 Wall Street—six offices with a reception area. The New York–based consultants busied themselves working not only for local industrial companies but also for investment banks like Kuhn, Loeb & Co. In 1934, the Chicago office moved to the forty-first floor of the new Field Building on 135 South LaSalle. By the mid-1930s, McKinsey’s partners were charging $100 a day for their services—a giant figure, though nothing compared with the founder himself, who was billing five times that, the highest rate for a consultant in the country.

From The Firm by Duff McDonald. Copyright © 2013 by Duff McDonald. Reprinted by permission of Simon & Schuster, Inc.

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Illustration by Kjell Reigstad

The Future of the Orgasm Industry

Longreads Pick

Nitasha Tiku goes inside the world of OneTaste, a San Francisco company dedicated to the practice of “orgasmic meditation,” or OM:

“I first heard about OneTaste in March, at a breakfast meeting with a venture capitalist who had newly moved to New York from San Francisco. She hadn’t felt compelled to try it herself, but she had a friend who worked at OneTaste, who would OM if she was nervous before a big meeting. They had lingo for the men who’d perfected the craft: ‘Master stroker—that’s what it’s called!’

“Genital stimulation in a professional context seemed transgressive, even for hippie-hedonist San Francisco. Her friend, Joanna Van Vleck—who is now OneTaste’s president—met me in June when she was in New York. ‘We don’t OM, like, right in the office,’ Van Vleck explained. But she said, ‘If we have employee problems, we’re like, let’s OM together. Yeah, if two people have a discrepancy, we say: OM together!'”

Source: Gawker
Published: Oct 18, 2013
Length: 32 minutes (8,147 words)