Search Results for: economy

Wall Street Isn’t Worth It

Longreads Pick

Who’s providing the real value in our economy? Quiggin argues that we shouldn’t be ready to dismiss the idea of dramatically shrinking the financial sector, which now makes up more than 20 percent of the U.S. GDP:

I’d like to look at a specific question raised by the discussion of private returns and social value, namely: can Wall Street, in its present form, be justified? That is, does the share of income flowing to corporations and professional workers in the financial sector reflect their marginal contribution to the total value of social output, so that, if their work ceased to be done and their skills were allocated elsewhere, we would all be worse off?

I argue that society as a whole would be better off if the financial sector were smaller, and received much smaller returns. A political strategy based on cutting the financial sector down to size has more promise for the Left than any alternative approach now on offer, and is a necessary precondition for a broader attempt to make the distribution of wealth and power more equal.

Source: Jacobin
Published: Nov 16, 2013
Length: 12 minutes (3,206 words)

Down Town

Longreads Pick

The city of Wilmington in Ohio, a “poster child of the Great Recession,” saw its unemployment rate shoot up to 19 percent after DHL, one of its biggest employers, left. The story of how the city is bouncing back:

Ironically, Wilmington’s reputation as the face of the recession ended up working in its favor. The endless media attention—The New York Times, CNN, USA Today, Jay Leno, Rachael Ray, Glenn Beck, 60 Minutes (twice) were among the dozens of outlets that covered DHL’s story—kept the politicians interested. And the political attention—from the governor’s office to the Oval Office, with two Congressional hearings thrown in for good measure—kept the focus on the crisis and possible solutions. “I wanted to stay on the front page,” Raizk said. “When you get pushed back to page 10, everybody forgets about you.”

At the Air Park, Kevin Carver put his energy into creating a functional Port Authority, which was essentially a shell when he was hired, with no staff, budget, or operating procedures. Then he turned to the central task: Figuring out how to redevelop a sprawling facility that was once the engine driving the local economy.

Published: Nov 1, 2013
Length: 17 minutes (4,375 words)

“In the postindustrial economy, feminism has been retooled as a vehicle for expression of the self, a ‘self’ as marketable consumer object, valued by how many times it’s been bought—or, in our electronic age, how many times it’s been clicked on. ‘Images of a certain kind of successful woman proliferate,’ British philosopher Nina Power observed of contemporary faux-feminism in her 2009 book, One-Dimensional Woman. ‘The city worker in heels, the flexible agency employee, the hard-working hedonist who can afford to spend her income on vibrators and wine—and would have us believe that—yes—capitalism is a girl’s best friend.’”

Susan Faludi, in The Baffler, on the Lean In movement and the history of feminism and capitalism. Read more on Sheryl Sandberg here.

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Image via Wikimedia Commons

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“The growth of the Internet will slow drastically [as it] becomes apparent [that] most people have nothing to say to each other. … By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s…. Ten years from now the phrase information economy will sound silly.”

Paul Krugman, 1998 (via New York Review of Books). Read more on the past, present and future of the Internet.

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Photo via Wikimedia Commons

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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

Facebook Feminism, Like It or Not

Longreads Pick

Susan Faludi’s takedown of “Lean In,” and a brief history of feminism and its relationship with capitalism: “In the postindustrial economy, feminism has been retooled as a vehicle for expression of the self, a ‘self’ as marketable consumer object”:

“In 1834, America’s first industrial wage earners, the ‘mill girls’ of Lowell, Massachusetts, embarked on their own campaign for women’s advancement in the workplace. They didn’t ‘lean in,’ though. When their male overseers in the nation’s first large-scale planned industrial city cut their already paltry wages by 15 to 20 percent, the textile workers declared a ‘turn-out,’ one of the nation’s earliest industrial strikes. That first effort failed, but its participants did not concede defeat. The Lowell women would stage another turn-out two years later, create the first union of working women in American history, lead a fight for the ten-hour work day, and conceive of an increasingly radical vision that took aim both at corporate power and the patriarchal oppression of women. Their bruising early encounter with American industry fueled a nascent feminist outlook that would ultimately find full expression in the first wave of the American women’s movement.”

Source: The Baffler
Published: Oct 17, 2013
Length: 36 minutes (9,021 words)

Reading List: Stories From the Working Class

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Emily Perper is a word-writing human for hire. She blogs about her favorite longreads at Diet Coker.

I read a brilliant piece, “Zen and the Art of Cover Letter Writing,” that reminded me that I had not yet featured the stories of those suffering under the yoke of this abusive economy.

These are stories about injustice, about broken promises, about frustration and desperation and of course, debt. This is a list for anyone caught in a gross transition period, in a dead-end job, who is trying to make something, anything work out long-term. This is a list for anyone who has been told to “just find a job” or “you can do anything you set your mind to” or “your generation is so lazy/narcissistic/vapid.” This is a list for anyone who has been late on their rent, or hassled by credit card companies, or received overdue loan warnings. You’re not alone.

1. “Young, Multi-Employed, and Looking for Full-Time Work in San Francisco.” (Lucy Schiller, The Billfold, May 2013)

The Billfold is my go-to site for voyeurism, empathy, financial advice, and great storytelling. Schiller and her friends attempt to “ford the murky river of the hiring process” of self-employment, multiple part-time jobs and internships—anything but traditional full-time work.

2. “Retail Workers Need Rights, Too.” (S.E. Smith, This Ain’t Livin’, Febraury 2013)

Retail workers work long hours for practically minimum wage, with hidden physical and emotional abuses, few benefits, and intolerant leave policies.

3. “How She Lives on Minimum Wage: One McDonald’s Worker’s Budget.” (Laura Shin, Forbes, July 2013)

A single mother of four shares the harrowing experience of living on her part-time job’s minimum wage.

4. “‘We’ve Got Ph.D.s Working as File Clerks.” (Will Owen, The Washington Blade, June 2013)

The recently founded Association of Transgender Professionals (ATP) works to further transgender equality in the workplace in the U.S. and abroad. ATP helps trans* individuals prepare for interviews, apply for jobs, and find employment; it also assists companies in recruiting LGBTQ folks.

5. “The Burdens of Working-Class Youth.” (Jennifer M. Silva, The Chronicle of Higher Education, August 2013)

Silva spoke to over a hundred working-class citizens in Lowell, Mass. and Richmond, Va. She found that education for working-class teens is no path to success; rather, these students have no one to advocate for them or explain the labyrinthine bureaucracy of higher education and financial planning, which ends in a dead-end of debt and frustration.

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On Muppets & Merchandise: How Jim Henson Turned His Art into a Business

Photo by Eva Rinaldi

Elizabeth Hyde Stevens | Make Art Make Money | September 2013 | 17 minutes (4,102 words)

 

In 2011, Longreads highlighted an essay called “Weekend at Kermie’s,” by Elizabeth Hyde Stevens, published by The Awl. Stevens is now back with a new Muppet-inspired Kindle Serial called “Make Art Make Money,” part how-to, part Jim Henson history. Below is the opening chapter. Our thanks to Stevens and Amazon Publishing for sharing this with the Longreads community. Read more…

Reading List: Believe in Your Selfie

Emily Perper is a word-writing human for hire. She blogs about her favorite longreads at Diet Coker.

I’m tired of middle-aged white dudes critiquing my generation as selfish and narcissistic. Often, the selfie is held up triumphantly as the very symbol of our self-degradation. Here, four other, more intelligent perspectives on selfie culture:

1. “A Good Angle is Hard to Find.” (Sarah Hepola, The Morning News, September 2013)

The author, a self-identified “selfie enthusiast,” simultaneously critiques and defends the selfie phenomenon. She explains that selfies allow her to capture her solitary travels and control how her life looks, while acknowledging the complaints of narcissism.

2. “The Young-Girl and the Selfie.” (Sarah Gram, Textual Relations, March 2013)

Gram looks at selfies in light of capitalism: “In an economy of attention, it is a disaster for men that girls take up physical space and document it, and that this documentation takes up page hits and retweets that could go to ‘more important’ things. And so the Young-Girl must be punished, with a disgust reserved for the purely trivial.”

3. “Snaps of America.” (Larissa Pham, Full Stop, September 2013)

A cross-country road trip, a modern-day archivist, a Wendell Berry poetic analysis—Pham marvels at the Midwest and stakes her claim to memory in this piece.

4. “In Praise of Selfies: From Self-Conscious to Self-Constructive.” (Casey N. Cep, Pacific Standard, July 2013)

This piece touches briefly on several aspects of the discussion surrounding selfie culture, including its roots in self-portraiture, the opportunity to escape the male gaze and the tension between aspiration and authenticity.

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The Geeks on the Front Lines

Longreads Pick

The U.S. government is increasingly facing cyber threats that could affect our national security and economy. As a result, the government is courting hackers for cyber security jobs, but needs to overhaul its image to lure young talent, who can easily find well paid jobs in Silicon Valley and private security firms:

“To get a sense of just how weak our cyberdefenses are, I take a trip with Jayson Street, Chief Chaos Coordinator for another firm, Krypton Security, into the basement of a hotel in South Beach. We breeze past an open door with a taped sign that reads, ‘Doors must be closed at all times!!!’ This is where the brains of the building live – the computer network, the alarm system, the hard drives of credit-card numbers – but, as Street tells a brawny security guard, he’s here on the job, ‘doing a Wi-Fi assessment.’ Street, a paunchy, 45-year-old Oklahoman in a black T-shirt and jeans, flashes the hulk some indecipherable graphs on his tablet and says, ‘We’re good,’ as he continues into another restricted room.

“The doors aren’t locked. No one seems to be monitoring the security cameras. The wires for the burglar-alarm system are exposed, ready for an intruder to snip. We make our way to the unmanned computer room, where, in seconds, Street could install malware to swipe every credit-card number coming through the system if he wanted to. ‘They’re like every other hotel I’ve tried to go into,’ he tells me. ‘They fail.'”

Source: Rolling Stone
Published: Sep 10, 2013
Length: 19 minutes (4,808 words)