Thursday, December 13, 2007

Citi Taps Investment Banking Head As CEO

NEW YORK (AP) — Citigroup Inc. named Vikram Pandit, the head of its investment banking business, as chief executive Tuesday, after searching five weeks for someone to restore the bank's profitability and reputation.

The banking company named Sir Win Bischoff, who has been Citi's acting CEO, as its chairman. He replaces Robert E. Rubin, who had stepped into the role when former CEO and chairman Charles Prince was ousted last month.

Pandit, 50, ran a hedge fund bought by Citi earlier this year, is seen as a careful, decisive investment banker — qualities Citi needs following the revelation that Citi's writedowns of soured mortgages could amount to as much as $17.5 billion by the end of the year.

Bischoff, meanwhile, has led Citi's European businesses, answering many shareholders' complaints that Pandit does not have the overseas experience to guide the sprawling bank's operations in Europe, Asia, Africa and Latin America. Before joining Citi in 2000, Bischoff, 66, was chairman of the British investment bank Schroders PLC.

The appointments came after a two-day meeting of Citi's board.

Pandit is well known on Wall Street. He worked at Morgan Stanley for two decades until 2005, when he and a few other disgruntled colleagues left the brokerage and founded the hedge fund Old Lane Partners.

Earlier this year, Citigroup bought Old Lane for $800 million and put Pandit in charge of Citi's alternative investments. A few months later, Pandit took over the bank's markets and banking unit, too, and then reconfigured the business to mirror the Morgan Stanley structure he was familiar with.

His performance as Citi's leader will undoubtedly be scrutinized by investors until they see positive results — including his willingness to challenge the Citi strategy of the past several years. One question on Wall Street is whether Pandit will be beholden to the Citi board, which has remained steadfastly loyal to the Sanford Weill regime. Weill, a board member, built Citigroup through a series of mergers and acquisitions over the past few decades, and many have attributed the bank's failings this year to the Weill culture: Prince was his hand-picked successor.

During a conference call with analysts, Pandit suggested he was open to selling certain units, as long as the sales were beneficial to the company.

"I will undertake an objective and dispassionate review of all the businesses, individually and in aggregate, to make sure we are properly positioned for the future," Pandit said.

Unlike Merrill Lynch & Co., which took just two weeks to find a replacement for Stan O'Neal, its embattled CEO and another casualty of the mortgage crisis, Citi's search dragged on. Merrill's nab of John Thain, a Goldman Sachs alum who turned around the once-troubled New York Stock Exchange, eliminated him as a possibility for Citi.

Citi, with all its bad debt — not to mention the hemorrhaging funds known as structured investment vehicles that it manages — appeared to be a beast no one wanted to tame.

According to various media reports, Citi's overtures to big names in the banking industry such as Deutsche Bank CEO Josef Ackermann and Royal Bank of Scotland CEO Frederick Goodwin were spurned. And Citi board member Rubin, the former Treasury Secretary who led the CEO search committee, decided he did not want to stay chairman.

Rubin said, however, that he anticipates "a long and active role at Citi."

Pandit faces multiple challenges. He must not only attract more cash to offset Citi's debt and bulk up the bank's risk management, but he also needs to strengthen Citi's lackluster consumer-oriented businesses and clean up its reputation.

Citigroup said in a regulatory filing that it has not yet determined Pandit's compensation. In 2006, then-CEO Charles Prince received nearly $25 million in pay.

Citi's stock has fallen about 40 percent this year, shaving off about $120 billion in market capitalization and putting it below that of Bank of America Corp. Its shares fell $1.54, or 4.4 percent, to $33.23 Tuesday when most shares fell after the Federal Reserve announced — at the same moment that Citigroup unveiled Pandit's promotion — that it was cutting the federal funds rate by one-quarter percentage point to 4.25 percent.

Citi is still the largest U.S. bank by assets, though, so while most major financial companies have seen problems navigating a surge in foreclosures and a freeze-up in credit, Citi's losses have been seen on Wall Street as particularly egregious.

Citi's cash levels will get a boost by the Abu Dhabi Investment Authority, which in late November bought a 4.9 percent stake in Citi for $7.5 billion. But the investment, while helpful in offsetting some of Citi's bad debt, is not a panacea. Many analysts and shareholders believe Pandit needs to sell more assets to bring in cash and make the huge conglomerate leaner. Citigroup has said non-essential assets selloffs are in the works, but many shareholders are hoping for more ruthless surgery.

The board has been adamant about not breaking up the bank.

Rubin, who led the search committee, said after Prince's resignation that they were looking for someone to focus on Citigroup's "multiplicity of businesses" and with "a strong international focus."

Pandit, though he spent his childhood in India, has little experience with banking abroad. His strengths are his decades on Wall Street and his analytical mind.

"Under the circumstances, I can't think of anyone better qualified to untangle Citigroup than Vikram Pandit," said Barton Biggs, who was Morgan Stanley's top strategist and worked with Pandit for two decades. Biggs, now the head of the hedge fund firm Traxis Partners, called Pandit intelligent, and not one to make "lightning-quick decisions."

"That doesn't mean he's not decisive — he's thoughtful and careful," said Biggs, who is also a Citi shareholder. He added that many colleagues have followed him from Morgan Stanley to Old Lane to Citi.

Even in the years that Morgan Stanley struggled, the investment banking unit did well, in large part because of Pandit, said Punk Ziegel & Co. analyst Richard Bove. "He proved at Morgan Stanley he could build a strong capital markets business."

But neither Pandit nor Bischoff have significant experience in consumer banking, which brings in half of the company's profit and which, compared to its peers, has seen lackluster results.

Pandit has also never run a large public company. And some see his lack of flash and pizazz as a drawback — though to others, a cool, quiet demeanor in the top spot could be just what is needed at a company often criticized as arrogant.

The incredible shrinking investment bank

CIBC World Markets is becoming the incredible shrinking investment bank as it moves this week to shut down its European leveraged finance operations.
Fifty staff learned on Monday that they are likely out of work as the division is closed. The logic is that while lending on European buyouts can be lucrative, it was a business that saw the investment bank taking on large credit exposure without much prospect of getting other fee-generating work from the clients.

In simple terms, European leveraged finance was relatively high risk, and risk is a four-letter word at parent CIBC these days.

The pull-back in London - where there are still 320 investment banking, foreign exchange and equity trading employees -comes on the heels of CIBC World Market’s decision last month to sell its 700-employee U.S. investment banking group. That sale, which played out for pocket change, reversed a decade-old U.S. expansion strategy.

CIBC World Markets is also exiting the structured credit business, most of which is U.S.-based, after taking a pounding on these derivatives. The bank said last week that it still faces the potential for “significant losses” on what was supposed to be a $9.9-billion (U.S.) hedged credit portfolio. A number of counterparties on these positions are bond insurers, and they are in deep financial trouble. Analysts expect the bank faces $2-billion in writedowns on these positions.
In addition to the steady downsizing of foreign operations, CIBC World Market is seeing some of its domestic operations moved to new homes in the parent bank. CEO Gerry McCaughey pulled the commercial banking sector out of the investment dealer on Monday, and placed the unit in the retail banking division that’s run by Sonia Baxendale. Like Mr. McCaughey, her roots are in wealth management.

Moving to this structure was billed as being consistent with other banks, and part of a two-year push to bring related client activities under one roof. But it also marks a further loss of horsepower at the dealer, the engine that drove the bank until Mr. McCaughey’s arrival in the corner office.

The sense at CIBC World Markets is that more cuts are coming - a marked contrast to a domestic rival such as RBC Dominion Securities, which is building global capabilities. Mr. McCaughey got the top job on a promise to eliminate the unpleasant surprises in CIBC quarterly reports, and produce a dependable stream of profits. The CEO, who ran CIBC World Markets for 18 months before moving to the parent bank in August, 2005, is still on a search-and-destroy mission for any business that puts that strategy at risk.

Under intensive care

UBS and Citigroup take steps to reassure investors. But big questions remain

SURGERY, as any doctor knows, is just one step on the road to recovery. Two of the biggest banking casualties of the carnage in America's mortgage market are out of the operating theatre—though not by any means in the clear. On December 11th, after five leaderless weeks, America's Citigroup announced that Vikram Pandit, the head of its investment-banking division, would be its new chief executive. The previous day Switzerland's UBS had unveiled write-downs and capital injections designed to reassure investors that the worst of the subprime crisis was over. But the long-term prognosis on these two huge banks remains decidedly uncertain.

UBS looks the healthier. Its announcement of a $10 billion write-down on its exposure to subprime-infected debt, to go with a third-quarter hit of $3.6 billion, hardly sounds like good news. UBS now expects a loss for the fourth quarter, which ends this month. It may end up in the red for the entire year. But in today's topsy-turvy market, the bank's decision to take a much more conservative view of the value of its assets was welcomed as a sign that further big mark-downs are less likely.

What is more, UBS strengthened its tier-one capital, an important measure of bank solidity, by SFr19.4 billion ($17.1 billion). Most of that money will come from sovereign-wealth funds, the white knights of choice for today's bank in distress. Singapore's GIC, which manages the city-state's foreign reserves, has pledged to buy SFr11 billion of bonds convertible into shares in UBS; an unnamed Middle Eastern investor will put in a further SFr2 billion. UBS will also raise money by selling treasury shares, and will save cash by issuing its 2007 dividend in the form of shares. Its capital ratio is expected to exceed 12% in the fourth quarter, a strong position.

Citi is following a similar course to UBS but it has more to do. It too has admitted that it might make huge losses, but further bad news is likely. Its estimate of an $8 billion-11 billion fourth-quarter hit on its collateralised-debt obligations was made in early November, since when the market value of subprime-related debt has declined further. It too has attracted money from a sovereign-wealth fund (last month's $7.5 billion investment by the Abu Dhabi Investment Authority) but its capital ratio remains under scrutiny given its exposure, not just to subprime-related investments but also to off-balance-sheet vehicles and to a wider deterioration in consumer credit.

Citi has mimicked UBS in cleaning out the management suite, but the search to find a successor to Chuck Prince, who was ousted as chairman and chief executive last month, revealed both a dearth of suitable candidates inside the bank and a lack of interested ones outside it. Doubts circulate about Mr Pandit's credentials for the role, despite his distinguished career in investment banking at Morgan Stanley, a spell running his own hedge fund and a reputation for cerebral calm. He joined Citi only in April, snipe the critics; this is his first time in the boss's chair at a listed company; and he has scant experience of consumer banking, which accounts for half of Citi's earnings.

For Mr Pandit and Marcel Rohner, his counterpart at UBS, the priority is to stabilise their banks. But each of them must then answer two, more fundamental questions. The first is what went wrong with their approach to risk management. Both banks wound up with larger exposures to toxic instruments than their rivals did; shareholders want to know why. (The line from UBS's top brass that, like hooliganism, the problems were down to a small number of people in one part of the company, does not wash: according to Simon Adamson of CreditSights, a research firm, the Swiss bank has long had a greater appetite for risk than its peers.)

The second question is whether the banks' business models need to change in light of the credit crunch. Mr Rohner stands by UBS's approach of combining an investment-banking arm with its booming wealth-management franchise, but there are clearly tensions between the needs of risk-averse private-banking clients and the volatile profitability of an investment bank. Mr Rohner promises to shrink the bank's balance sheet and to reduce the amount of proprietary trading it undertakes, as well as to tighten risk controls.

Mr Pandit has even thornier problems to resolve. Doubts about Citi's sprawling business model and disparate internal cultures predated the credit crunch: the bank's shares performed anaemically throughout Mr Prince's tenure. But diversification seems to have multiplied Citi's woes. Given the continuing questions about its capital base, the case for a break-up looks stronger than it did—although size has its own benefits, not least making institutions too big to fail. Mr Pandit, true to his reputation, is not going to rush any decisions. But sooner or later, more surgery looks inevitable.

PERMALANCES UNITE is a gossip blog best known for mocking Lindsay Lohan and generally lowering the level of discourse in the New York media world. But starting on December 4 the website put snark aside and helped instigate one of the most unlikely and successful labor campaigns of recent years. The sight of young, educated workers in the seismically unstable media industry using spontaneous online organizing to cope with innovative forms of corporate exploitation and disrespect throws a challenge to the labor establishment. Some see a new social movement being born.

Viacom, a Fortune 500 media company, had $11.5 billion in revenue last year. It includes the hip, youth-oriented cable networks MTV, VH1, Comedy Central and Nickelodeon. But the cachet of these names on a young college graduate's résumé is not matched by the way the company treats its workers.

Like scores of companies in the media industry and elsewhere, Viacom has increasingly shifted to workers who are not regular, salaried employees--both true freelancers and "permalancers." The term refers to those who may work full-time for several years--with duties, hours, and responsibilities very similar to regular employees--yet who are classified as temporary employees or independent contractors and do not receive the same recognition as regular employees. Someone like Alex Blagg. The 27-year-old comedian was hired two years ago to run VH1's Best Week Ever blog, the online version of the popular show. "I work pretty much forty to fifty hours a week," he says. "Sometimes on weekends. I'm responsible for maintaining and producing the site as well as collaborating with the staff of the BWE show, and I oversee about ten people--the other writers on the website as well as the production and interns."


By some accounts, permalancers and freelancers make up half the creative and production staff at Viacom networks--writers, animators, producers, editors, web designers. And they enjoyed unusually generous benefits for workers in these categories. But on December 4, as first reported in a post categorized "rumors" on Gawker, Viacom handed them some bad news.

Caroline O'Hare, a "freelancer" who has worked full-time in online promotions at MTV for two and a half years, said, "When they first told us about this, they called us in to pick up our holiday-party invites and then told us to pick up the paperwork for Cast & Crew," a company to which Viacom plans to start outsourcing the payroll and benefits administration for its nonregular employees. "I was looking through the packet and I was like, 'I'm sorry, where's my 401(k)?' They said, 'Oh yeah, you don't have that anymore.'"

The reliance on freelancers and independent contractors, in fact or in name only, is a prevalent business strategy to retain flexibility and cut labor costs, especially on expensive healthcare benefits. Another such strategy is the use of payroll companies, also known as "professional employment organizations" like Cast & Crew--a k a internal outsourcing (another oxymoron). In the case of Viacom, both strategies were at work. According to reports on Gawker and elsewhere, the rollback for freelance and contract employees initially included not only 401(k)s but paid vacation, holiday pay, tuition reimbursement, commuter pretax deductions, vision and dental benefits and, most important, a severely scaled-back healthcare plan. A typical story of life in the new economy? Sure. "I'm actually one of those people who fall into the 'go have a beer and bitch about it' camp," says Blagg. "When I took a job with Viacom I knew I was falling into bed with the enemy, and things like this are not out of the realm of what I would expect from them." And yet something was different this time. Maybe it was the Christmas timing. Or perhaps it was all the blogging, YouTube videos, newspaper and TV coverage of the television writers' strike--positive images of a sympathetic, educated, creative, unionized workforce, which aren't exactly common in today's mainstream media. "I think there's a general unrest in the media industry, with the writers' strike and the Broadway stagehand strike," Blagg, who wrote a post in support of the permalancers on his official Viacom-sponsored blog, says. "People are getting sick of feeling irrelevant and undervalued by these giant multinational corporations that are trying to increase their stockholder profits at the expense of the workforce that they rely on."

And new media was helping to keep this story alive, too. In twenty-six posts, photos and videos over the week, Gawker chronicled the company's action and the workers' response in its trademark snarky style, with posts tagged "evil corporations in action" and "permapoors." Maggie Shnayerson, a 26-year-old writer who joined Gawker in September, provided most of the coverage, which was quickly taken over by readers. "We were reporting pieces of information as people sent them to us," Shnayerson says. "Gawker provided a place where Viacom employees could come and find out what was going on with their colleagues." Viacom workers were commenting on each post and getting increasingly pissed off.

What fed the comment threads even more was the tin-eared way that Viacom delivered the news, even initially asking the employees to sign the new paperwork before attending the meeting to explain it--what one protester called an "HR clusterfuck."

But the responses weren't just online. Starting on December 10, about 200 Viacom permalancers walked out at 3 p.m. for an hour a day, picketing in Times Square. Many also showed up at the annual holiday party--an extravaganza at the Hammerstein Ballroom--wearing homemade T-shirts with the slogan "Permalancers Get Cancer Too." The protests seemed to be spontaneously self-organizing, as no one stood up to be identified as a troublemaker.

The combination of online assault by one of the city's most widely read blogs and direct action won concessions amazingly quickly. On December 6 Viacom announced that those whose 401(k)s had been frozen would get the chance to open new ones in 2008, though matching would still end and rollovers would not be allowed. On December 12, just before the daily walkout, management sent out an e-mail outlining further concessions--the reinstatement of the previous healthcare plan (exact requirements and deductibles unknown) and delaying of the switch to the Cast and Crew payroll organization from this month to February. Also on offer: vague promises to "review" the option to change employees' status from freelancer to staff.

Temporary--in both senses of the word--victory was sweet, and the strikers exulted in their power to be heard. "I can't believe they caved so quickly. Good work, rabble-rousers!" wrote a Gawker commenter dubbed PimpMyCouch. Yet the quest for proper treatment by members of the self-dubbed "creative underclass" has only just begun.

After all, companies created these newfangled categories of workers to get around existing labor laws. As first reported by Shnayerson, one factor that may have instigated Viacom's benefit cuts is an attempt by Governor Eliot Spitzer to enforce New York State's existing labor laws. In September he issued Executive Order 17, creating a joint task force on employee misclassification, defined as improperly calling an employee an independent contractor. This practice, Spitzer said, is often "an attempt to avoid the employers' legal obligations under the federal and state labor, employment, and tax laws, including...minimum wage, overtime...unemployment insurance, workers compensation...and income tax."

Calling someone who works full-time, on-site, for several years and who collects benefits a contractor or temp can get a corporation in all kinds of trouble. Just ask Microsoft, which famously paid almost $100 million plus millions in payroll taxes to settle a lawsuit by its own permatemps. Viacom may have rolled back benefits and outsourced the administration of its nonstandard employees in order to create a bright line for the governor's task force. Or it may just have been a move to preserve the company's stock price.

The "MTV strike" has a resonance far beyond one company. The Warhol Economy, a new book by Elizabeth Currid, a professor of urban planning at USC, demonstrates that creative industries like art, fashion, design and media are New York City's true economic engine. Compared with white-collar workers from other industries, these workers are even more likely to cope with unpaid internships in order to break in and nonstandard employee status even as they get more established in their industries. In January New York City's comptroller released a study showing that self-employment has accounted for nearly two-thirds of the increase in the city's job base since 1997. Yet self-employed or misclassified workers by definition still live without access to health insurance or other benefits.

The question is where to take this energy. Exactly which labor organization, if any, is best positioned to take up the cause of permalancers citywide remains to be seen. Striking Writer's Guild members stood in solidarity with the Viacom workers for a joint picket on December 13, but the WGA can't offer them representation. Jesus Sanchez is an organizer for Local 1212, the New York Radio and Television Broadcast Engineers Union, representing technical workers at CBS and Univision. He showed up to support each day of the Viacom walkout. "I've been on the phone all day drumming up more support from the institutions I've worked with over the years," he said on Wednesday. "I spoke to the state AFL-CIO yesterday." He argues that given the right organizing, Local 1212 could potentially get Viacom permalancers a collective bargaining agreement--though they'd first have to establish that they were misclassified. "You can call them what you want--they're employees," he says.

Sara Horowitz of the Freelancers' Union has a different take. "I've never seen people in this part of the workforce walk off their jobs like this," she says. "I think they're ready to start articulating their needs in a real way, and our role is to help provide structure and coherence and infrastructure and ways we can be supportive and go where it goes."

Her organization has more than 50,000 members nationwide, 15,000 of whom are independent workers in New York City who get health insurance at group rates through the union. She first heard of the walkout on Gawker, and then through Viacom workers who began contacting the Freelancers Union about getting health coverage. They started a Meetup group on the Freelancers Union site, which has drawn about thirty members.

Horowitz sees the need for a much broader response than negotiation with one company to fight misclassification while preserving true flexibility by providing all workers with portable benefits. "This is the beginning of a social movement," she says, "and it's not always going to be linear and coherent."

Saturday, December 1, 2007

PETA Takes on Mitsubishi Fried Chicken

Here's a somewhat lighter story for the weekend after yet another week filled with international economic strife and turmoil. It partly concerns the resurgence of the infamous "Curse of the Colonel" in Japan. You might not be aware of the fate of the Japanese baseball team the Hanshin Tigers. In 1985, the perennially underperforming Tigers inexplicably went on to win the Japan Championship Series, the first and only time it has done so. Rabid Hanshin Tigers fan had (have?) a tradition of celebrating their team's success by jumping into the nearby, heavily polluted Dotonbori River. As they sing the team fight song, they call out each player's name, and the fan whose likeness most resembles that of the player called jumps into the river. After winning the championship, fans were celebrating in understandably high spirits until they called out the name of Randy Bass, an American with MLB experience who was the reigning Japanese league MVP. Unsurprisingly, no one in the crowd resembled the bearded, Caucasian player.

The nearest thing Tigers fans could spot that resembled Randy Bass was a nearby plastic replica of one Colonel Sanders at a Kentucky Fried Chicken restaurant. In their excitement, they chucked the good colonel into the Dotonbori. The day after, the polite Japanese fans realized their excesses and apologized to the KFC store owner, vowing to fish the good colonel out of the Dotonbori and return him to his rightful place peddling chicken to Japanese diners. Unfortunately, the colonel was never found. For eighteen straight years afterwards, the Tigers recorded losing seasons. Up to now, the team has yet to return to the Japan Championship Series. And thus a curse was born that's far more hilarious than anything the Chicago Cubs have had to endure.

This brings me to the current manifestation of the curse on KFC. Japanese zaibatsu (conglomerate) Mitsubishi has decided to acquire a larger stake in the Japanese operation of KFC. Before being able to do so, though, Mitsubishi has been cursed by attention from the US-based animal rights group People for the Ethical Treatment of Animals (PETA). The group is famous for making publicity stunts to get its message across, and this current battle for chicken supremacy has made some waves in Japan. While I am, on the balance, sympathetic with some of PETA goals of more humane treatment of animals, its methods are sometimes questionable. In any event, the "Curse of the Colonel" seems to cut both ways at the baseball franchise and the chicken franchise as well. From Singapore's Straits Times:

Japan's largest trading house on Wednesday rebutted a request by animal rights activists to reconsider its plan to take a controlling stake in the Japanese operations of Kentucky Fried Chicken (KFC). The US-based rights group People for the Ethical Treatment of Animals (Peta) wrote a letter to Mitsubishi Corp. urging it to reconsider its plan to spend US$120 million dollars (S$ 173 million) to take control of KFC Japan.

KFC has become one of Japan's most popular fast-food chains since it first established itself here in 1970, marketing itself as a 'traditional' US food for holidays and many Japanese buy fried chicken on Christman Eve. But Peta accuses KFC suppliers of mistreating chickens.

'KFC's suppliers force chickens to live in filthy conditions where many suffer ammonia burns on their skin as well as crippling injuries from being bred to grow so large so fast that their weak legs cannot support their massive upper bodies,' Peta director Jason Baker wrote in the letter, which was given to media. 'They scald millions of birds alive in feather-removal tanks and cut the throats of billions of birds while they are still conscious,' he added.

Mitsubishi said there were no plans to withdraw the tender offer. 'I'm not sure whether (Mitsubishi) and Peta have a common understanding of the issue,' said a company spokesman. Mitsubishi already has a stake of 31.11 per cent in KFC Japan and plans to buy an equal sized stake from US-based KFC, a subsidiary of Yum Brands. Mitsubishi Corp also distributes chickens and other ingredients to the 1,500 restaurants in Japan of KFC and Pizza Hut, which is operated by KFC.

KFC dismisses Peta's claims of chicken cruelty and says it has undertaken studies to ensure that its suppliers use the most humane form of slaughter. The US-based rights group is famous for its publicity stunts in campaigning for animal rights. Last month it launched a successful campaign to persuade Miss Universe - Japan's Riyo Mori - to stop wearing fur.

Tuesday, November 6, 2007


Cornell University law professor Jonathan Macey (now a professor at Yale) called the prosecution of Mike Milken "the vengeful response by America's business and regulatory establishment to Mr. Milken's phenomenal success." Macey wrote:

"As deplorable as Joe McCarthy's attacks on alleged Communists were in the 1950s, the government's attack on Michael Milken during the 1980s was even worse. It was more conspiratorial; it sent more people to jail, and it was, at bottom, an attack on such fundamental American values as entrepreneurship, individual responsibility and, ultimately, capitalism itself." (The Wall Street Journal, July 18, 1995)

Despite many erroneous press reports to the contrary, he was not guilty of insider trading and he didn't contribute to the savings and loan crisis. Upon his release, columnist George Gilder wrote, "The entire case against him has collapsed." Ethicist Norman Barry said the case involved "trivial offenses" and was "an affront to the rule of law." A detailed analysis of the Milken case can be found in the book, Payback, by Professor Daniel Fischel of the University of Chicago Law School. An April 2005 editorial in BusinessWeek concluded, "Milken's legacy is a favorable one in much of the business community."

John Steele Gordon, a prominent business historian and author of a definitive book on Wall Street, suggests that the government charges may have been a result of "ambitious prosecutors" lusting after a high-profile case. In April 1992, the lead prosecutor, assistant U.S. Attorney John Carroll, speaking at Seton Hall Law School, admitted that in the Milken case, "we're guilty of criminalizing technical offenses ... Many of the prosecution theories we used were novel. Many of the statutes that we charged under hadn't been charged as crimes before."

The judge found only one transaction that Milken pleaded to had any economic impact — and that was only $318 thousand. The editor of Forbes said he was "a scapegoat" and the U.K. newspaper, The Guardian, expanded that to "a high-profile scapegoat." However, Milken accepted responsibility for the specific actions to which he pleaded.

Writing in the London Sunday Times, columnist Irwin Stelzer said:
"Michael Milken transformed American industry as Ronald Reagan transformed the American political scene. [Milken] contributed mightily to converting American industry into a lean, mean, internationally competitive machine. Whether or not Milken, in the course of his assault on the status quo, bent or broke some of the rules governing financial transactions is still being debated, with his defenders persuaded that his punishment for violating such rules was more the revenge of the establishment than the just desserts of a willful lawbreaker."

On a web site about business journalism, former Wall Street Journal reporter Dean Rotbart wrote (April 2002) about what he called the "successful prosecution of Milken in 1989 on six obscure securities law violations":

"Most journalists covering Milken were far too shallow to explore the political and business interests that benefited from his prosecution and expulsion from the industry. Rather, the news media embraced the stereotype of 'greedy Mike' and created such a hue and cry for his beheading that the government had little choice to oblige … But as with most media stereotypes, time has demonstrated amply that Mike Milken isn't the man the media portrayed. Mr. Greed, it turns out, had always been a philanthropist and is today one of the nation's leading philanthropists ... Milken not only disproved his media critics long ago, he made them irrelevant."

In August 2002, Stephen Presser, the Raoul Berger Professor of Legal History at the Northwestern University School of Law, commenting on the "prosecutorial zeal" in the Milken case, said:

"[W]hen an administration or a prosecutor wants to make a political point, strict legalities and strict realities are hard to come by."

The late Robert L. Bartley, then editor emeritus of The Wall Street Journal, wrote (May 2002):

"Various politicians caused a savings-and-loan crisis and the 1990 recession by inflating deposit insurance and leaning on regulators not to clean up thrift balance sheets. Their fall guy was Michael Milken and his supposedly malign junk bonds, which in fact had almost nothing to do with the S&L problem and have since been universally recognized as a legitimate financing tool. Mr. Milken was coerced into a plea bargain involving six trading violations elevated into felonies. The 1990 recession did shake out a real insider-trading ring. Its mastermind, Ivan Boesky, got off with a three-year sentence by … fingering Mr. Milken and others; cases based on his information collapsed … Prosecutors and politicians want scapegoats, and often have the collaboration of businessmen. With … Milken, business competitors egged on prosecutors, as is happening today with Bill Gates. And the truly culpable parties can get off lightly by conning prosecutors with the promise of bigger fish."

More recently (May 2006), George Gilder, a contributing editor of Forbes magazine, wrote in the Gilder Technology Report:

"After five years of federal harassment of the high yield security market that he pioneered, Milken went to jail in 1991 on a tidal wave of journalistic and judicial blindness to what he was doing, aggravated by the ulcerating grip of envy at his success in doing it."

Finally, in a September 2006 Financial Times column, Norman Barry, professor of social and political theory at the University of Buckingham, wrote:

“In retrospect, most American economic observers say that Mr Milken was good for the economy; his actions led to the break-up of conglomerates and the necessary reorganisation of American business. His prosecution was more of a persecution.”

American Prosecutors Deserve Count Of Monte Cristo

By Paul Craig Roberts

There’s a great movie playing, a rendition of Alexander Dumas’ The Count of Monte Cristo. Go to see it. It speaks to the injustice of our own time--only our legions of wrongfully convicted lack the power of the Count of Monte Cristo to take revenge on the snitches and corrupt prosecutors who frame them.

Dumas’ novel is a tremendous story brimming with excitement and plot. I don’t know if it is read today. In my youth everyone read it for the spellbinding thrill of the story and simultaneously absorbed the didactic message to hate injustice.

Every prosecutor and policeman should be required to read the book several times and to keep a copy visible on their desks. Indeed, what we need is a real world Count of Monte Cristo to make an example of the corrupt prosecutors who routinely ruin the lives of innocent people.

There are prosecutors who deserve the worst that could possibly befall them, but, alas, no Counts of Monte Cristo. Michael Milken had enough money to be one, but he let Rudy Giuliani get away with framing him.

Giuliani not only got away with it, he parlayed the name recognition that he gained to become New York Mayor. From this perch he parlayed the Muslim terror attack on the World Trade Center into becoming Time Magazine’s “Man of the Year” and recipient of the Ronald Reagan Freedom Award from the Ronald Reagan Presidential Foundation in Beverly Hills on February 8. This was followed with an honorary knighthood from Queen Elizabeth and a fountain of glowing editorials.

In Dumas’ novel, the crooked prosecutor is utterly ruined, but ours just keep on climbing higher in public esteem.

Injustice is rife when people have no conscience. In our time, only politically correct official “victim groups” are deserving of concern, and the compassion they receive is orchestrated for the purpose of advancing political agendas.

The old adage that it is better for 10 guilty men to go free than for one innocent person to be punished has been turned on its head. Today’s rule is: better for 10 innocents to be sent up the river than for one guilty to escape.

Nothing better reveals the state of injustice in America today than Massachusetts Governor Jane Swift’s refusal last week to release an innocent man on the grounds that it might hurt her political future. That tells you all you need to know about her conscience and, if she is right, about the conscience of the people of Massachusetts.

Giuliani took advantage of the liberals’ demonization of the Reagan presidency as the “era of greed” and ordinary people’s envy of Wall Street incomes to make a name for himself on the backs of innocents.

Giuliani went into motion with an assault, staged for media, on the financial firm Princeton/Newport with fifty federal marshals outfitted with automatic weapons and bulletproof vests. His purpose was to create the impression among the public that hardened criminals operated in the financial arena.

Next he staged the handcuffing of two New York investment bankers on their trading floor. Although his victims were later exonerated in federal courts, Giuliani had set the stage for his run at Michael Milken.

To this day no evidence exists that Milken committed any crimes or engaged in any conduct that had ever before been considered criminal. Milken was a victim of Giuliani criminalizing minor regulatory infractions and coercing him into a plea bargain.

Giuliani's assistant U.S. attorney John Carroll admitted as much. At Seton Hall Law School in April 1992, Carroll said that in the Milken case “we’re guilty of criminalizing technical offenses. Many of the prosecution theories we used were novel. Many of the statutes that we charged under hadn’t been charged as crimes before.”

In other words, the prosecutors made up the laws that they accused Milken of breaking and applied them retroactively.

Carroll was very proud of how clever the prosecutors were in orchestrating Milken’s frame-up. He went on to say that they were looking for other areas where they could ensnare people by reinterpreting routine behavior as crimes. Apparently, the law students were impressed, not outraged, with the skill at which prosecutors abuse their power in order to convict a target.

Giuliani himself bragged that by painting his targets black, “the media does the job for me.”

The cases brought by prosecutors are so shoddy that few can stand the light of a trial. Instead, prosecutors pile on the charges until the bewildered defendant accepts his lawyer’s advice and cops a plea. Only one case in twenty ever goes to trial.

Plea bargains keep the conviction mill running and the prosecutors’ budgets growing. Justice plays no role.

Citigroup: Too Big to Fail?

William Greider

The fall of Citigroup is a resonant political event--akin to the Republican Party's failure to win reform of Social Security--only this time the bell tolls for the Democratic Party. The creation of Citigroup as an all-purpose financial supermarket and too-big-to-fail banking marvel was very much the accomplishment of Clinton Democrats. They enacted the law in the late 1990s that authorized this megabank monstrosity, with coaching from Treasury Secretary Robert Rubin, Fed chairman Alan Greenspan and of course Sanford Weill, the creative genius who built Citi.

Now that this institution has slid into deep trouble and Rubin has been appointed emergency chairman to rescue it, Democrats inherit the stink. They made this mess possible. Will they now accept the meaning of Citigroup gone sour and begin to undo the damage? That is, undertake reform of the financial system in fundamental ways? I doubt it, though the message is obvious.

Just as the GOP dreamed for decades of dismantling Social Security, investment bankers campaigned for thirty years to repeal the Glass-Steagall Act, which separated commercial banking from its investment-house cousins. This was the New Deal achievement enacted in response to the double-dealing banking practices that contributed to the crash of 1929. Bankers pushed their depositors into buying the corporate stocks the bankers were hustling, among other malpractices. Wall Street hated the law but failed year after year to win repeal. The problem was always Democrats (since Republicans were sure supporters).

Bill Clinton delivered his "New Democrat" party, accompanied by lots of happy talk about magic words like "synergy" and how "modernization" would create a more stable (and profitable) financial system. It did the latter, for sure, but not the former.

Actually, the combination of insurance, investment banking and old-line commercial banks multiplied the conflicts of interest within banks, despite so-called "firewalls" supposed to keep these activities separate. Much like Enron, placing some deals in off-balance sheet entities did not insulate Citigroup from the losses in its swollen subprime housing lending. The bank has so far written off something like $15 billion and more to come.

Think of Citigroup's rise and fall as another high-water mark for the conservative order. Like Social Security reform, it looked like a sure thing in politics. It was accompanied by the usual encouragement of lavish campaign contributions. On the downside, no one will remember having voted for it.

Reforming the deregulated financial system is another test for the new "New Democrats." I expect it will take them a while--maybe years--to face up to the implications. This is a far more daunting challenge--substantively and politically--than reforming healthcare or restoring labor organizing rights. Other megabanks like JP Morgan Chase also exist and will argue they have none of Citigroup's flaws. As investors (including pension funds) continue to lose billions in the deformed financial system, government will continue to worry more about the survival of these banking institutions that generate the losses. The megabanks are indeed "too big to fail" and, if that seems likely, Washington will come to their rescue in the name of protecting the soundness of the system. What a scam that is.

At least the unambiguous truth about "financial modernization" is now on the table for all to see. That should keep the Wall Street guys from whining for a while about the oppressive nature of bank regulation. The next reform era, when it does finally arrive, will head in the opposite direction--restoring public protections for the little guys against the greedy excesses of big hogs.

The Education of Mike Milken


"'Gotta go to Moraga!' That's what everybody says," notes a visitor to the Oz-like place where the American educational revolution is being plotted: "That's the code word for going to the mountain." In truth, "Moraga" is a three-story building on a cul-de-sac of that name in the hills above the exclusive Los Angeles enclave of Bel Air. Moraga is near the haciendas and sprawling glass palaces of the men whom Michael Milken and his junk-bond wizardry transformed from a band of small-time entrepreneurs into kingpins of global commerce and technology. Few of those billionaires could have imagined that just three years after leaving a minimum-security prison near San Francisco, where he served twenty-two months for fraud, rigging securities prices and other felonies, Milken would have engineered a comeback as the putative Bill Gates of the untapped gold mine known as American education.

In 1996 a $500 million pot from Milken (who paid the Feds a $1.1 billion fine as part of his plea bargain but remained one of America's richest men), his brother Lowell and Oracle Corporation chief executive Larry Ellison launched Knowledge Universe (KU), a holding company for an impressive transnational array of enterprises in the business of training human minds. While Milken operates from Los Angeles, the president, Tom Kalinske, a former head of Mattel and Sega, ostensibly runs the firm from Northern California, and 9,500 employees are scattered around the US and Great Britain in various operating entities.

The former Junk Bond King is positioning himself as a sort of Sam Walton of gray matter, offering Americans one-stop shopping for smarts from their diaper days to emeritus rank. Milken's company, with annual revenues of $1.2 billion, has bought or purchased stakes in everything from Children's Discovery Centers (CDC, also known as Knowledge Beginnings), the nation's sixth-largest preschool company, with 25,000 toddlers in nearly 300 locations across the United States; to Spring, Britain's largest vocational-training firm. KU owns or has invested in more than a dozen companies involved in computer training, proficiency testing, educational toys, strategic consulting and CEO training, as well as private, for-profit schools (nearly 400 at last count, ranging from preschool to secondary).

From a business standpoint, the education industry is certainly tempting: As a $600-billion-and-growing market, it is larger than either the military budget or Social Security. Like healthcare a few decades ago, it is dominated by government and nonprofits, and it is the target of sustained (and sometimes justified) attacks for inefficiency and failure. Milken's for-profit ventures are only the most ambitious of a number of aggressive capitalist incursions into the once-gentle confines of service-oriented pedagogy. And they've captured Wall Street's attention. Stock prices of two competitors, DeVry of Chicago and Baltimore-based Sylvan Learning Systems, which both provide a cafeteria line of educational technology and services, have almost tripled over the past three years. CBT Systems, a provider of business-training software and a subsidiary of another KU competitor, CBT Group, went public in 1995 at $16 a share and, had it not split, would have a stock value of more than $200 today. Even household names like Sun Microsystems, Microsoft, Oracle, Apple, Sony and the Washington Post Company are getting in on the racket, investing millions in education-related enterprises. "It's absolutely an exciting time to be involved in this industry," notes Michael Moe, an analyst with Merrill Lynch who specializes in education securities. Moe estimates that the for-profit component of the US education and training industry was $70 billion in 1998, and that it will grow at 13 percent annually for the next few years.

In the most traditional area of education--preschool, K-12 and college--Milken is a for-profit player. He has a minority stake, likely to become a majority, in Nobel Education Dynamics, a Pennsylvania company that runs 139 schools in thirteen states. He plays a role in the for-profit early-childhood field through CDC and is an investor in the startup online Knowledge University and the Internet education company The business of for-profit schools has a mixed record, in both financial and educational terms, but it continues to expand: The "virtual" University of Phoenix is now the fastest-growing and largest provider of higher education for working adults in the country, with more than 60,000 students. The Edison Project, founded with great fanfare by former Yale University president Benno Schmidt and new-media entrepreneur Chris Whittle in 1991, is avidly seeking contracts to manage public charter schools. It now has fifty-one under its control, though it has yet to turn a profit.

Companies like Milken's are not just competitors with public schools; they are poised to supplement the traditional classroom, viewing public and nonprofit educational institutions--as well as for-profit firms--as both potential customers and avenues to a vast consumer base. What distinguishes much of the capital now pouring into education is that it is linking the previously sacrosanct domain of the classroom with more conventionally business-dominated information spheres. With its array of holdings in software, corporate consulting and educational service companies, Milken's Knowledge Universe perhaps best exemplifies this trend, but it can also be discerned in the strategy behind KU's closest rival, Sylvan, which had 1998 earnings of $36 million on revenues of $440 million. It is as ambitious as KU, with holdings in testing preparation and administration, teacher education, English-language training, long-distance learning and college-level study abroad. Sylvan insists it isn't out to supplant public and nonprofit schools, but to complement them.

As noted in books such as Robert Reich's The Work of Nations and Jeremy Rifkin's The End of Work, changes in the economy have raised the stakes considerably. Many economists contend that knowledge is increasingly the commodity that determines economic success and failure. A 1997 Education Department study showed that college graduates who participated in additional training from the beginning of their employment earned an average of $601 per week, compared with $461 for those who did not. Among everyone from preschoolers' nervous parents to older workers fearful of being overtaken by better-trained youngsters to firms struggling to retain a competitive work force, the demand for superior technical knowledge grows steadily in tandem with the fear of falling behind. This has become the new conventional economic wisdom, justifying everything from federal investment in education and training at the expense of job-creating economic stimulus packages to massive private capital flows into the burgeoning field of creating and disseminating information.

As Milken asked rhetorically in a rare interview with the Los Angeles Times, "What type of world are we living in?" He offered his own answer: "One where intellectual capital is the most valuable component." And if he has his way, it will soon be a world controlled to a large extent by educational conglomerates like his. Even if Milken's most direct impact is within the for-profit education sector, the effect of his range of investments on public schools could be profound. Not only are public schools purchasing KU's educational products but they are watching Milken's schools closely, both as a potential model and as a competitive threat.

Philanthropist King

Thanks in part to Milken's fanatical secrecy, his flurry of acquisitions has received remarkably little public attention. Even Benno Schmidt of the Edison Project oddly pleads ignorance of the Milken for-profit operations. Instead, Milken is widely hailed in the press as a philanthropist, noted for his work in educational and other nonprofits. Long before he began cobbling together an eclectic array of "knowledge" businesses--and even before the law got to him--he was establishing himself as a significant force through his giving. In the early eighties the Milken Family Foundation National Educator Awards were established, and by 1987 Milken was doling out cash prizes to promising teachers and administrators. The awards bestow $25,000 checks annually on "the best" teachers and administrators; 1,330 educators--many widely admired as progressive innovators--have been awarded thus far with nearly $30 million of Milken's money. Milken began another charity, the Milken Scholar's Program (which offers financial aid to selected high school students entering college), in 1989 while he was facing prosecution that would land him in prison. He also dreamed up Mike's Math Club, a concept through which he (himself a product of public schools), and now hired staff, would land their sleighs in inner-city schools to dispense fun and accessible math lessons. Towering over Milken's charitable efforts is his well-publicized $25 million search for a cure for prostate cancer. (He survived a bout in the early nineties, and pumps millions a year into research, besides donating proceeds from his low-fat cookbook.)

Two nonprofit entities, the Milken Family Foundation and a think tank called the Milken Institute, founded in 1991, operate from offices on a palm-tree-lined avenue in Santa Monica, several miles from Moraga. Milken, who was rumored to be frustrated with the institute because of its scholarly remove from the worlds of politics and business, hosted the second of his Milken Institute Global Conferences at the Beverly Hilton Hotel (site of Milken's Predator's Balls in the eighties) in early March. Nobel laureates such as economist Gary Becker mingled with California Governor Gray Davis, controversial Russian oligarch Boris Berezovsky and high-level reps from Goldman Sachs and OppenheimerFunds, ruminating on the future of the world economy. The Milken Institute Review was recently relaunched with former New York Times columnist Peter Passell as editor; Passell's debut issue features contributors ranging from MIT economist Paul Krugman to former Fed governor and George W. Bush adviser Larry Lindsey. Milken himself contributed an article in which he identifies "intangible assets such as human capital, management information systems, software and digital distribution systems"--all on KU's acquisition list--as the key features of today's marketplace.

Former associates say Milken is obsessed with discouraging cynical speculation about links between his for-profit and not-for-profit orbits. A notoriously covert operator in his Wall Street heyday, Milken today has an extra incentive to keep an arm's distance from the details of his for-profit educational ventures: Following his conviction in 1990 he was permanently barred from brokering financial deals. Because Knowledge Universe is a holding company, not an investment firm, and because Milken is a founder and part-owner rather than executive, he is somewhat insulated from such accusations. However, the post-prison Milken has succumbed once to the lure of filthy lucre: In 1998 he admitted to improperly acting as a broker in a deal involving MCI and Rupert Murdoch's News Corporation, coughing up a $47 million fine.

If you believe his personal spokesman, Geoffrey Moore (who doubles as a senior vice president at Knowledge Universe), Milken is basically a full-time philanthropist: "He doesn't have time for interviews; he's too busy saving lives." During a recent TV appearance, Milken dodged Charlie Rose's attempts to discuss anything but his charity work. Moore insists that Milken is just "an investor" in the myriad educational ventures controlled from Moraga. Not so, say insiders, who contend that Milken is the same old business junkie he was at Drexel Burnham Lambert, where he was always at his desk by 4:30 am. "He does it full time, day in, day out," says Joseph Costello, a former Knowledge Universe CEO. "Every day of the week. Forget weekends, holidays. 'Cause that's his life. That's his art."

Milken's brother Lowell ostensibly runs the philanthropic ventures, but it's hard to separate the outfits entirely since the brothers are veritable Siamese twins. "They've been partners in all these things," says Columbia University Teachers College president Arthur Levine, who has followed Milken's attempts at educational reform and innovation closely. "Talking to them, they're almost interchangeable." Throughout his Wall Street career, Milken relied on Lowell, a lawyer by training, to handle both his personal investments and the structuring of tax shelters (Milken cut a deal with prosecutors whereby he took the heat for himself and his brother). "His brother is in with him on all ventures," says Joseph Carrabino, a former president of the California State Board of Education, who served on the faculty of UCLA's Graduate School of Business with Milken and knows both brothers. "He's like his alter ego."

Intellectual Venture Capital

In three years, the privately held Knowledge Universe has risen to 150 on the Forbes Private 500, and, at $1.2 billion, it is twice the size of its competitor KinderCare, an education company majority-owned by an affiliate of legendary buyout firm Kohlberg Kravis Roberts. According to former Knowledge Universe CEO Costello, he and Milken divided education into several main areas: K-12, business training and continuing education (including community college and professional certification). In the United States, they estimated, K-12 is worth a whopping $250 billion and business education some $70 billion, with continuing education falling somewhere in between.

The diminutive, workaholic Milken declined a Nation interview request, but the magazine was able to speak with four people who have worked inside Milken's coalescing business empire and with a number of outsiders who have dealt with him. Most question whether he's as suited--by temperament or inclination--to the task of educational reform as he is to the financial horse-trading that characterizes his for-profit company. "He's like an addicted shopper," says Costello, who left Knowledge Universe in early 1998 over strategic differences. "They told us to buy absolutely everything that was possibly buyable in the education world," says another former staffer, who requested anonymity, noting that some former associates have been threatened with lawsuits for talking to outsiders. Milken defined education broadly, and has spoken of a "cradle to grave" role in forming the human mind. He tried to buy Simon & Schuster's textbook division and saw gold in daycare, children's toys, curriculum creation, textbook publishing, charter-type school management and, for businesses, in offering everything from information technology training to courses on sexual harassment.

Milken is following the example of large toy companies like Hasbro by swallowing up promising small firms whose products can be sold to classrooms. In 1997 Milken bought LeapFrog, an Emeryville, California-based maker of award-winning toy products such as The Book Wizard (a child points a "magical pen" at this interactive book to hear the story). LeapFrog books are provided to reading centers courtesy of the nonprofit Riordan Foundation, established by LA Mayor Richard Riordan, a close pal of Milken's. Another KU unit, Reston, Virginia-based MindQ Publishing, also markets classroom-oriented software.

Milken has talked of dominating legal training and college prep courses, according to former insiders, and grandiosely pondered taking positions in media companies, themselves on the outer reaches of the knowledge universe. Costello thought Milken was out of control, wanting to go in too many different directions at once. "They'd look at these giant things, doing some kind of a leveraged buyout of temp agencies," recalls Costello. "They were all over the map." Knowledge University, Milken's version of an online institution of higher learning, is one of KU's most prominent flops. An idea that promised Internet courses taught by the nation's top professors, it has yet to open its virtual doors. The "University" now lies in disrepair in the hands of a Chicago consulting firm, from which KU has retreated to a minority stake.

Costello, considered a golden boy for his ten-year tenure at Cadence Systems, which during his reign became the world's leading supplier of electronic-design-automation software, argued for a strategy targeting modes of education best equipped to address anticipated changes in society. Milken's vision, by contrast, encompassed both innovative educational products and services and more conventional ones. For example, Milken wanted to put $100 million into buying existing language-training companies. "I said, Jesus, why buy an old dog for a hundred million bucks?" Costello recalls. Instead, he urged spending $10-$20 million to create a new model for language training. Costello, who continues to admire Milken in many respects, left after two and a half months of working with him.

In fact, Milken seems most successful when he is not reinventing the wheel but buying existing businesses in hot categories, and then doing whatever it takes to pump up the company's value--such as offering educational "breakthroughs" like jump-starting the sandbox set with early math and language training. Still, many KU holdings remain volatile, making it difficult to predict whether Milken will realize his expansive business aims. A case in point is KU's Nextera Enterprises, a 600-employee consulting arm offering corporate strategy planning and personnel development, which grew a whopping 745 percent last year but showed a net loss of $1.6 million. Two competitors, CBT Group and Learning Tree, have three times the sales. But perhaps the most interesting thing about Nextera, which is being spun off as a public company, is the direction it is taking and what that may say about Milken's broad definition of education and about his values. Nextera recently bought Lexecon Inc., which dispatches economics and law professors to assist companies accused of wrongdoing. For example, Lexecon expert witnesses trooped into courtrooms on behalf of handgun manufacturers facing liability suits and helped Merrill Lynch executives weather scrutiny of their role in the bankrupting of Orange County.

Where Do You Want to Go Today?

Arthur Levine of Columbia's Teachers College has spent as much time as anyone talking with Milken and has a strong sense of why Milken casts his net so widely. "We're seeing publishers, television, museums, libraries, universities--all of them are in the knowledge business and what they're all doing right now is beginning to produce the same products.... Suddenly what we have is a brand-new world in which Michael Milken is probably the most visible of all the entrepreneurs. Does one worry? Of course one worries."

Milken is perhaps uniquely equipped to play the game of leveraging assets and promoting synergy. He pushed through the conventional Wall Street firewalls, working not just as a broker on behalf of bond issuers but also as a middleman for the buyers. And he constantly linked his clients, pushing every possible opportunity for one component to ignite income opportunities in another. It's not unlikely that Milken will see synergistic opportunities with many of the corporate titans he helped enrich during the seventies and eighties--people like Rupert Murdoch and Ted Turner, and companies like MCI, TCI and Time Warner. The conceivable possibilities for incorporating their products (from Sports Illustrated to The Simpsons) into education are endless: Imagine, for instance, a line of "Homer does Homework" products. The trend is already here: Chris Whittle's Channel One introduced advertising into public schools in 1989. Dozens of schools are now allowing for-profit companies access to elementary students for focus groups in return for computers, and the widespread use of Nike and other brand names in math textbook problems has prompted angry parents to lobby for bans.

One good thing that can be said about Milken is that he's not likely to be pushing any philosophical obsession on his students. He has put forth a few modest ideas, including the notion that preschoolers are ready to dip into foreign languages and preliminary algebra; he also envisions using classroom technology to deliver national-standard educational lessons. And he thinks that the sort of incentives that work well in business will produce higher-quality education. But if his Wall Street reign is any guide, the game is not about a particular political ideology but about finding assets that are undervalued, then structuring them in such a way that value is generated and investors make money.

Still, even Milken is not above a little editorial control. Would he allow a Milken School to assess the go-go eighties critically? "Absolutely not," says a former colleague. Such concerns seem borne out in a book produced by a Milken-backed publishing house, Knowledge Exchange. Its Business Encyclopedia approvingly cites Milken's role in the junk-bond market without mentioning the economic and social devastation associated with it. Of the bonds, it declares, "Though considered to be highly controversial, high-yield securities have emerged as an important investment category as well as a critical source of financing for growing companies."

Educators worry that if curriculum and the tools of teaching (let alone schools themselves) are controlled by conglomerates like Milken's, many of the virtues of public education will be lost. Roger Bowen, president of the State University of New York at New Paltz and an advocate for public schools, says that people like Milken "forget that one of the best outcomes of 'traditional' education is improved socialization and civic values. Techno-educators seem altogether indifferent to building a stronger democratic society." And when the emphasis is on selling a certain vision of the future--one that is intimately linked to the prosperity of private firms in the knowledge business--the welfare of students may well get short shrift. Indeed, there are no reliable studies demonstrating that technology can actually improve educational performance in the trenches of America's public schools. "No doubt, some solitary souls and antisocial types thrive using new learning technologies; and there is plenty of evidence that the television generation adores the computer screen," says Bowen. "But the mere conveyance of information, which computers do quite well, is only a small part of what the educational process should be."

The best hope for preventing the debasement of education as just another corporate product may lie in public control over curriculum. "One of the things that may happen is we may see more states dictating curricular content...and demanding accountability standards in these profit-making schools," says Levine. At the moment, very few do. California, with the largest total number of students, doesn't even license K-12 schools, according to Carolyn Pirillo, deputy general counsel for the California Education Department: "We stipulate branches of study [English, history and the like] but I'm sure nobody has tried to enforce [even] this content on private schools, and I'm not sure what would happen if we did." A school could offer health classes that sing the praises of Twinkies, Ho-Hos and Ding-Dongs for building strong bodies--with nary a worry.

On one level, it is unsettling even to contemplate that the business of education--from software to SAT prep courses to employee training--may lie in the hands of a man who became infamous by helping financiers take over and gut companies, throwing thousands out of work and producing nothing but payoffs for investors. As James Stewart argued in Den of Thieves, Milken's reign served as a catalyst for extensive layoffs and economic recession. Would he blanch at making "surplus" teachers "redundant"? Or at maximizing profits by underpaying labor? "Education is labor intensive if it is done well," says Bowen. "Simpletons who argue that education can be made 'cost-effective' by relying more on learning technologies are seldom educators themselves. The corporatization of American education results in techno-educators getting the ear of education-bashers who are eager to prove more comes from less." Indeed, two recent studies have documented that for-profit schools in Arizona and Michigan have slashed teacher salaries, special-ed services--and transportation for students, which has increased racial segregation in schools.

The dirty little not-very-secret is that educational establishments, which still shape our society more than any other institutions, are being turned over to those who see life as one giant Risk board. Progressive educators may win the battle to halt the full-scale privatization of our schools; nearly 90 percent of American children are still educated in public schools. But if we lose sight of the war for control over their content, the future may belong not to teachers and students but to the new proprietors of knowledge--corporate executives and investors. Surely, too, judging education based on measurable "improvements," which corporations love to do in flogging their whiter whites and wider seats, has its nefarious side. Will it come down to how schools market themselves rather than how well kids learn and what they learn? Will students even be permitted, for example, to see the negative consequences of unfettered greed? In an era when even our most basic public institutions are being shaped by financial interests, defending these core principles has become an increasingly important struggle.

Gold Reaches 27-Year High on Dollar, Oil Records; Silver Gains

Nov. 6 -- Gold rose to the highest since 1980 as record oil prices and a slumping dollar increased concern that inflation will accelerate. Silver jumped to the highest in 26 years.

Oil surged as high as $97.07 a barrel in New York and the dollar extended its slide to the lowest ever against the euro, boosting the appeal of precious metals as an inflation hedge. Investment in the StreetTracks Gold Trust, an exchange-traded fund backed by bullion, has risen 32 percent this year to a record 598 metric tons.

``The falling dollar is the very definition of inflation,'' said Chip Hanlon, president of Delta Global Advisors Inc. in Huntington Beach, California, which manages about $1.2 billion. ``A weak dollar makes the cost of living for all of us go higher and gold is the best hedge against that.''

Gold futures for December delivery rose $14.40, or 1.8 percent, to $825.20 an ounce at 12:10 p.m. on the Comex division of the New York Mercantile Exchange. The price earlier climbed to $827.20, the highest for a most-active contract since Jan. 21, 1980, the day gold reached a record $873. Gold has rallied 29 percent this year, heading for the seventh straight annual gain.

Silver futures for December delivery rose 63.5 cents, or 4.3 percent, to $15.42 an ounce in New York, after earlier reaching $15.54, the highest for a most-active contract since Jan. 21, 1981. Before today, silver gained 14 percent this year.

Weakening Dollar

The dollar fell to $1.457 against the euro, the lowest ever, on speculation losses related to U.S. subprime-mortgage defaults will prompt the Federal Reserve to reduce interest rates for a third time this year.

Gold gained 23 percent last year when the dollar dropped 10 percent against the euro. The dollar is down 9.3 percent against the euro in 2007 and has fallen 3.9 percent since Sept. 18, when the Fed lowered the overnight lending rate for the first time in four years. The Fed cut rates again by 0.25 percentage point to 4.5 percent on Oct. 31.

Five of the past six bear markets for the U.S. currency have resulted in a gold rally. Interest-rate futures indicate investors believe there is a 62 percent chance the Fed will lower rates to 4.25 percent by Dec. 11, compared with a 6 percent chance a month ago.

``Everyone should keep accumulating gold and selling dollars,'' said James Turk, founder of, which had $237 million of gold and silver in storage for investors at the end of October.

$1,000 Prediction

Turk expects gold to breach $1,000 in 2008. He correctly predicted last year gold would rise above $800 in 2007. ``Gold remains cheap and the dollar is still way overvalued,'' he said.

Adjusted for inflation, gold is still below its all-time high. Based on 1980 dollars, the January 1980 record of $873 would be $2,185.68 today.

Gold priced in other currencies has also gained this year. Gold denominated in euros has gained 17 percent in 2007 while gold priced in yen climbed 24 percent. Gold reached a record 395.89 British pounds today.

``This gold market is up, up and away,'' said Ron Goodis, futures trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``The dollar is going to keep skidding. We don't know if it's going to be a recession, inflation, stagflation. People want to buy gold.''

UBS AG today raised its one-month forecast to $850 from $700. National Bank Financial last week said gold would reach $900 in the next 12 months.

Dollar, Oil

``With the two external drivers of gold -- a weak U.S. dollar and strong oil -- together conspiring to lift the metal higher, we are now in range of a move to the all-time nominal high of $850,'' said UBS AG analyst John Reade.

Gold for immediate delivery in London rose $16.90, or 2.1 percent, to $823.40. The spot price has averaged $677.64 this year.

Crude-oil futures traded higher on concern demand will outpace supply. Gold reached its record in January 1980 after oil costs doubled in a year, sparking a surge in the rate of inflation to 14.8 percent in March 1980.

Still, some investors caution gold's rally since mid-August may be overdone.

``The dollar, oil and gold have moved too far too fast and are ripe for substantial corrections,'' said Jim Pogoda, an investor in Summit, New Jersey, and a former precious-metals trader for Mitsubishi International Corp.

Speculative net-long positions on the Comex are near record highs. Hedge funds and other large speculators increased net- long positions, or bets prices will rise, to 198,606 contracts on the Comex as of Oct. 30, up from 186,304 a week earlier, according to the U.S. Commodity Futures Trading Commission.

The 14-day relative strength index for gold futures topped 80 today after staying above 70 for the past seven sessions. When gold's RSI last topped 80 on Oct. 1, the metal dropped $17.80 the next day.

U.S. Stocks Advance, Led by Producers of Energy, Commodities

Nov. 6 -- U.S. stocks rose the most in four days, led by commodity and energy companies, after oil climbed to a record and gold advanced to a 27-year high.

Exxon Mobil Corp., the largest U.S. crude producer, posted its biggest gain in seven weeks. Newmont Mining Corp., the world's second-biggest gold producer, rallied to the highest since July 2006. JPMorgan Chase & Co. and Bank of America Corp. helped carry financial companies to their first advance in four days.

The Standard & Poor's 500 Index added 4.93, or 0.3 percent, to 1,507.1 at 12:55 p.m. in New York. The Dow Jones Industrial Average gained 21.54, or 0.2 percent, to 13,564.94. The Nasdaq Composite Index slipped 1.73, or 0.1 percent, to 2,793.45. Benchmark indexes in Asia and Europe also climbed.

``Materials are feeding the global boom,'' said Michael Williams, who helps oversee $2.8 billion as managing director of Genesis Partners in New York. ``There is a wide gap between the demand for product and output of product.''

Today's gains were led by two of the three best performing industries of the year. Energy companies in the S&P 500 have rallied 28 percent since December for the top advance among 10 groups as oil prices climb toward $100 a barrel. Producers of raw materials have added 22 percent as a surging global economy boosts demand.

Energy Rally

Exxon gained $2.20 to $89.86. ConocoPhillips, the third- largest U.S. oil producer, added $1.09 to $85.01.

Crude oil for December delivery rose as high as $97 a barrel in New York on speculation that U.S. inventories declined for a third week and as a storm closed production in the North Sea.

Newmont added $1.60 to $53.94. Gold futures for December delivery rose $14.40, or 1.8 percent, to $825.20 an ounce as record oil prices and a slumping dollar increased concern that inflation will accelerate.

The S&P 500 Financials Index climbed 0.4 percent. JPMorgan, the third-biggest U.S. bank, added 94 cents to $43.71. Bank of America, the second biggest, climbed $1 to $45.45.

Financial shares reversed a loss after Goldman Sachs Group Inc. denied market speculation that the most-profitable securities firm was preparing to announce a large writedown.

``The rumors seem to be getting more fanciful by the minute,'' said Lucas van Praag, a spokesman at Goldman in New York. ``We said there was no truth to them last week and the situation has not changed.''

The S&P 500 Financials Index climbed 0.4 percent. JPMorgan, the third-biggest U.S. bank, added 94 cents to $43.71. Bank of America, the second biggest, climbed $1 to $45.45.

MasterCard Inc., the second-biggest payment-card network, advanced $13.68 to $199.61. Deutsche Bank Securities raised its recommendation on the shares to ``buy'' from ``hold,'' increased its price estimate for the stock by 88 percent to $250 and lifted its revenue and earnings forecasts for 2007.

Google $850 Estimate

Google Inc., owner of the world's most popular search engine, increased $10 to $735.65. Sanford C. Bernstein & Co. lifted its 12-month share-price forecast to $850 from $720, saying the company's expansion into mobile-phone software and Internet video will improve revenue and profit.

Research In Motion, maker of the BlackBerry e-mail phone, added $2.25 to $130.22. Credit Suisse Group upgraded the company to ``outperform'' and said the shares may reach $160 in the next 12 months. Annual profits may increase at a 40 percent pace in the next three to five years, boosted by higher demand from international markets, analysts including Michael Ounjian said.

Earnings at technology companies in the S&P 500 may climb 10.3 percent this year and 24 percent next year, according to the average of analysts' estimates compiled by Bloomberg on Nov. 2. The 2008 profit growth estimate is the highest among 10 industry groups.

Archer Daniels Midland Co. climbed $2.53 to $37.05. The world's largest grain processor said first-quarter profit rose 9.4 percent as increased sales of wheat, corn and soybeans more than made up for declines in ethanol prices.

The Morgan Stanley Capital International Asia Pacific Index added 0.6 percent, while Europe's Dow Jones Stoxx 600 Index increased 0.4 percent