Morgan Stanley and Citigroup are in talks to merge their brokerage operations in a deal that could result in Morgan taking over Citi's Smith Barney unit, people familiar with the situation told CNBC.Rubin Resigns from Citigroup]]>

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Hey Congress, act boldly and act now! That pretty much sums up President-elect Barack Obama's speech Thursday on the need for a stimulus package to reverse the economy's downward spiral. The speech, which was an unprecedented public policy effort for an elected president to make before his inauguration, was delivered at George Mason University in Virginia but its intended audience is sitting on Capitol Hill. Obama repeatedly spoke to members of Congress, imploring them to avoid their usual legislative process which can include weeks of debate and countless earmarks for pet projects. Instead, Obama asks them to overcome partisanship and act immediately. While he acknowledges the pressure his plan will put on the budget deficit, which the Congressional Budget Office estimates will hit $1.2 trillion this year before this stimulus package, Obama emphasized the potentially greater costs of doing nothing. "For every day we wait or point fingers or drag our feet, more Americans will lose their jobs. More families will lose their savings. More dreams will be deferred and denied. And our nation will sink deeper into a crisis that, at some point, we may not be able to reverse."Today's speech was short on details and long on urgent rhetoric. The Obama transition team estimates that the stimulus package will cost at least $775 billion, but that figure could climb as high as $1.3 billion by some estimates. This will include tax cuts for working families and relief for states burdened by overstretched budgets. It will encompass public works projects as well as private sector growth in energy and health care sectors. Obama estimates the plan will create or save three million jobs over the next few years. The speech also included a shout-out to the many Wall Street firms that have received TARP money, suggesting the days of loose accountability for how the funds are spent are over.  Obama's package will include further efforts to save embattled banks from bankruptcy, "but only with maximum protections for taxpayers and a clear understanding that government support for any company is an extraordinary action that must come with significant restrictions on the firms that receive support."     Related LinksFinally, Drama! A Geithner vs. Bair Clash?Obama's Real Economic TeamObama's Economic Team

"Having been under pressure from the cash crunch since August last year from the U.S. subprime mortgage crisis, I worked hard to have my investors at least recover their principal. I feel sorry to my friends for failing to achieve that. I'd like to pay my debt back by death." Those were the words a 55-year old South Korean asset manager wrote before he killed himself in a Seoul hotel room last fall. Financial pressure. Regret. Failure. Suicide. Sadly, it's a pattern repeating itself in many other financiers' lives around the globe during this economic downturn. Earlier this week, the German billionaire Adolf Merckle ended his struggle to emerge from massive corporate debts with the decision to throw himself in front of a train. And yesterday, Steven Good, a well-known real estate executive from Chicago, gave into the pressure by turning a gun on himself. It's the same story we've heard over and over since this crisis began. The laid off Bear Stearns banker leaps from a Manhattan building, the London-based investment manager jumps in front of a high-speed commuter train, the French hedge fund investor slits his wrists after finding out his clients' investments in Bernie Madoff's fund had vanished overnight. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "article", "index" : "0"},"mediaType2":{"value" : "article", "index" : "0"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/news-markets/top-5/2008/12/28/The-Hope-Indicators","url2":"/news-markets/national-news/portfolio/2009/01/07/Environmental-Investing","url3":"/views/columns/economics/2009/01/07/Spotting-Signs-of-Economic-Recovery","url4":"","teaser1":"When will we ever see signs of a recovery? Ten things to start watching for in 2009.","teaser2":"How investors can survive and thrive during environmentally challenging times.","teaser3":"Why it’s possible that this downturn could end quicker than anyone thinks.","teaser4":"","headline1":"The Hope Indicators","headline2":"Growing Greenbacks","headline3":"The Case for Optimism","headline4":"","title":"Also on Portfolio.com" }'); And it's not just the suicides of the rich making headlines. Foreclosed homes, lost jobs, and depleted savings accounts are driving too many people to take their lives. But are suicides actually on the rise, or are merely the reports of suicides on the rise? This question has been studied and debated for decades by historians, researchers, academics and mental health professionals. Studies showing rising suicide rates during times of economic recessions are consistently conflicted by studies that prove the opposite. We know that the stories of stockbrokers jumping from skyscraper windows on Black Monday were nothing more than urban myths. But we also know that suicide rates did rise dramatically during the years following the stock market crash of 1929. Indeed, the highest rate of self-inflicted deaths in the U.S. occurred in 1933, the same year the unemployment rate reached an all-time high of 25 percent. The American Association of Suicidology recently released a statement underscoring that, while suicide rates have shown no clear association with times of economic recession, there is a clear relationship between suicide and unemployment. Stressful life events can lead to suicide, and the trade group is particularly concerned about the potential effect the rising foreclosure rates could have on the psyche of the most vulnerable homeowners. Whatever the historical statistics show, there is ample anecdotal evidence that the economic hardships many individuals are facing today can lead to depression, and depression can lead to suicide. Suicide hotlines in a number of states have reported significant increases in call volume. The World Health Organization warned last fall that many countries could see a rise in suicides and mental health illnesses. The recent reports of financially linked suicides around the globe should be enough to make everyone look out for potential signs of suicide among those most affected by the financial crisis. Because financial debts should never be paid back by death. Related LinksThe Case for OptimismWorst of TimesWhen Will It End?

Time Warner's new-year surprise $25 billion writedown today was bad enough, because it suggests that the media giant's advertising-supported cable, publishing, and internet businesses are worth less and less with each passing quarter. Worse is its warning of a probable loss for all of 2008, because it would be the first loss in six years and comes less than two months after it had forecast earnings of more than $1 a share. (Though it's unlikely to come close to the $98.7 billion loss posted in the year after the disastrous merger of AOL and the original Time Warner.) But worst of all is what Time Warner's profit warning suggests for the rest of the industry, particularly newspapers, magazines, and all of the other old-media companies struggling to transform themselves into Web-based information businesses. J.P. Morgan analyst Imran Khan took Time Warner's announcement and backed out some online advertising numbers. What he found confirmed his suspicions about Web-ad spending trends. In a note to investors, Khan concluded that Time Warner's profit warning suggested an 18 percent year-over-year decline in online advertising revenue at the company's AOL unit. He reckoned that the change could have translated into a $64 million drop in revenue in those three months alone. Where did the money go? Certainly not to Time Warner's cable or magazine publishing businesses: They, too, were reporting declines. Some of the decline may well have been attributable to a general retreat in ad spending during a particularly nasty economic slump. But Khan said it also illustrates a shift away from online "display" ads—the banners across the top of web pages or the boxes filled with animation and music—and toward search-based ads. Those are the dull, but particularly effective plain-text ads that pop up on search engines or are added to web pages by brokers like Google. "The implied weakness is consistent with our thesis that online advertising budgets are being reallocated to search," Khan wrote. "Although AOL historically underperformed the market, we think the broader implication here is that demand continues to soften."Related LinksOnline Ad Revenue UpYahoo Earnings: Just How Bad?Search Advertising's Scalability Problems

Spurred by the surprise emergence of new evidence on a computer hard drive, the Securities and Exchange Commission has reopened a major insider trading investigation it was strongly criticized for dropping, people with knowledge of the case said. The inquiry has to do with giant hedge fund Pequot Capital Management and its chairman and C.E.O., Arthur Samberg. Portfolio.com has learned that within the last two weeks the S.E.C. issued a subpoena in the case, a step taken only in a formal investigation approved by senior agency officials. Reopening the investigation marks a new embarrassment for the beleaguered S.E.C., suggesting that, as in the Bernard Madoff case, it may have failed earlier to follow up adequately on strong indications of possible wrongdoing. People close to the case said the subpoena is for the hard drive from a computer owned by David Zilkha, a former Microsoft employee who briefly worked for Pequot in 2001. The S.E.C. and other federal investigators already have printouts of e-mail messages on the hard drive. Copies of the emails obtained by Portfolio.com appear to show Zilkha soliciting nonpublic information about Microsoft from a neighbor who was a more senior official at the software company. The original S.E.C. investigation, which ended in 2006 without the agency taking any action, had looked into whether Samberg had made highly profitable trades based on confidential information from Zilkha about Microsoft earnings. The earlier investigation, which had focused on Pequot trading in 2001, drew wide attention after the S.E.C. in 2005 fired the lawyer handling it. The S.E.C. lawyer, Gary Aguirre, contended he'd been fired for political reasons relating to a separate facet of the case: Whether Morgan Stanley C.E.O. John Mack may have given Samberg inside information relating to a planned acquisition by General Electric. Aguirre claimed he was fired because higher ups at the S.E.C. didn't want him to depose the politically connected Mack. A subsequent investigation by two Senate committees, and by the S.E.C.'s own inspector general, backed Aguirre and found that the S.E.C. was wrong to have shut down the investigation. Ever since, two Republican Senators, Arlen Specter of Pennsylvania and Charles Grassley of Iowa, have pressed the S.E.C. to reopen the case. The existence of the hard drive became known through Zilkha's contested divorce case in Connecticut. People close to the case say that Zilkha's now ex-wife had obtained and kept the hard drive from his home computer before they split up. The drive contains email exchanges between Zilkha and Mark Spain, a more senior Microsoft official, in 2001, when they were both living in Redmond, Washington. At the time, Zilkha was still working for Microsoft, although Samberg had offered him a job and was pressing him for information on Microsoft. Copies of the newly obtained emails show, for example, that on April 7, 2001, Zilkha sent Spain an email with the subject line "Any visibility on the recent quarter?" The message said: "Hey there. Have you heard whether we will miss estimates? Any other info? David."  A reply from Spain the next day said: "march was the best march on record. made up the shortfall in us sub w2k pro major contributor. on trace for revised forecast (MYR)" That email appeared to indicate that Microsoft was likely to do much better than the substantially lower earnings analysts at the time were predicting. "w2k" pro evidently refers to sales of Microsoft's Windows 2000 program, and "MYR" to mid-year review. As a product manager, Zilkha normally wouldn't have been privy to overall corporate earnings information. The hard drive doesn't contain any evidence that Zilkha passed the information to Samberg. But the exchange between Zilkha and Spain appears to fill a key gap in evidence obtained during the original S.E.C. investigation. The timing coincides with Samberg trades in Microsoft puts and calls, and fits in with other email traffic between Samberg and Zilkha. On April 6, 2001, for example, Samberg wrote to Zilkha that he owned Microsoft but was worried about reports that Microsoft was about to disclose weak profits. "Any tidbits you might care to lob in would be appreciated," Samberg wrote. The records show that Samberg had been considering reducing his position in Microsoft at the beginning of April 2001, after he'd suffered losses and analysts had forecast that Microsoft would report a drop in earnings. But on April 9, Samberg started buying thousands of Microsoft puts and calls, which had the effect of greatly increasing his bet that the stock would rise. When Microsoft disclosed better-than-expected earnings on April 19, Samberg reaped an indicated profit of more than $12 million on his added investment. The day after Microsoft's earnings announcement, Samberg emailed Zilkha: "I shouldn't say this, but you probably have paid for yourself already." While the newly obtained emails from Zilkha's home computer don't prove that he passed information to Samberg, people close to the case said it would provide additional basis for the S.E.C. to investigate whether Zilkha had communicated inside information to him. The Senate committees' report in 2007 had specifically faulted the S.E.C. for not looking into any communication between Samberg and Zilkha between April 6 and April 9, 2001. New questions about Samberg's relationship with Zilkha began cropping up a few weeks ago. As Portfolio.com reported, recently filed records in Zilkha's divorce showed that beginning in April 2007, Samberg paid Zilkha $1.4 million, and has promised to pay him an additional $700,000 in April 2009. Senate investigators have been looking into whether the payments may have been some type of reward to Zilkha for not giving information to investigators. Zilkha had worked for Pequot for only a few months in 2001 before Samberg fired him, testimony from the S.E.C. investigation shows, and Zilkha has had no known link to Pequot or Samberg since then. The Senate Judiciary and Finance committees recently demanded that Samberg turn over any records explaining the payments to Zilkha. He responded, but in the Senate on Tuesday Specter said that the information wasn't adequate and that the committee was trying to obtain more. Meanwhile, Specter disclosed that he had written to S.E.C. chairman Christopher Cox on Dec. 29, demanding that the insider trading investigation be reopened. The issue cropped up in the divorce case because Zilkha disclosed the payments on financial statements he is required to file with the court. The ex-wife, Karen Zilkha, is seeking to her ex-husband and Samberg about the payments under oath. Aguirre, the former S.E.C. lawyer, went further than Specter. In a January 2, 2009 letter to Cox, he called for opening a criminal investigationinto "possible witness tampering, bribery, obstruction of justice" and conspiracy. In addition to the Samberg payments to Zilkha, Aguirre wrote that prosecutors should look into Zilkha's apparent failure to have turned over the email records while the original investigation was still open. A December 2005 S.E.C. subpoena to Zilkha required him to turn over all email records of his contacts in 2001 with Microsoft and Samberg. The S.E.C. declined to comment. David Zilkha didn't respond to messages left on his cell phone number seeking comment. His attorney, Henry Putzel III, said he wouldn't have any comment. Mark Spain didn't immediately respond to a message left at his office phone number at Microsoft. A Microsoft spokeswoman said the company wouldn't have any comment. A Pequot spokesman said he wouldn't comment on specific developments but said: "We will cooperate fully with all requests for information and are confident that Pequot's trading in Microsoft was at all times proper."Related LinksSticky WindowsReport: Enterprise to Embrace Web 2.0 as Prices DropGoogle to Microsoft: Game On

Two young men, traders on John ­Paulson’s staff, come into his hedge fund’s office seeking advice on whether to buy a certain debt security. Sitting just a few feet away, I have no idea what Paulson tells them. His slightly high-pitched voice is so soft that on the rare occasions he is forced to speak in public, he’s easily drowned out by the rustling of papers or the clearing of throats. When he appeared before a U.S. House committee in November to try to explain how he had lavishly profited while countless others had suffered, Paulson spoke so gently, even when inches from the microphone, that representatives repeatedly, and with growing irritation, had to ask him to speak up. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "slideshows", "index" : "4"},"mediaType2":{"value" : "graphic", "index" : "6"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/slideshows/2009/01/Bosses-at-Ailing-Hedge-Funds","url2":"/graphics/2009/01/Tracking-Paulsons-Success-in-a-Weak-Market","url3":"/executives/features/2009/01/07/Goldman-Sachs-Alumni-in-Finance","url4":"/culture-lifestyle/culture-inc/arts/2009/01/07/The-Making-of-Money-Never-Sleeps","teaser1":"John Paulson may be thriving, but most of the other hedge fund kings are fading fast.","teaser2":"Even before the market turmoil of 2007, Paulson has been outperforming other indices.","teaser3":"Blankfein. Steel. Thain. Paulson. Kashkari. See a pattern? ","teaser4":"Fox hits up Hollywood A-listers to make a sequel to Oliver Stone's Wall Street.","headline1":"A Dying Breed","headline2":"Paulson's Winnings","headline3":"The Usual Suspects","headline4":"Get Me Rewrite, Rewrite, Rewrite","title":"More From Portfolio.com" }'); Paulson is smart enough to know that at this particular moment in history, the less he’s heard from, the better. The simple reason: He is not suffering. In an era in which losers are universal and making a profit seems somehow shady, Paulson is the most conspicuous of Wall Street’s winners. Paulson & Co.’s funds (with an estimated $36 billion under management and growing by the day) were up a staggering $15 billion as the markets teetered in 2007; one fund gained 590 percent, another 353 percent. All this reportedly garnered him a personal payday of $3.7 billion, among the biggest in history. In 2008, his funds didn’t climb nearly as much but were still successful enough to put him at the very top of his profession. By scoring returns of this magnitude, Paulson has dwarfed the success of George Soros, whose currency trades in the 1990s made him so much money that he has spent much of the rest of his career atoning for them. Paulson makes no apologies. During our conversation in his conference room, he describes in detail how he pulled off the greatest financial coup in recent history—a two-year bet that the calamity we are now experiencing would take place. It was a megatrade involving dozens of financial instruments, along with prescient wagers that banks like Lehman Brothers would eventually go under. (View a graphic showing how much John Paulson has outperformed other indices.) Left unexamined is the uncomfortable moral dimension of Paulson’s achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down? Do traders who figure out a way to profit from our misery deserve our contempt or our admiration, however grudging? The question has long dogged that most hated species of Wall Street trader, the short-seller who profits by trading borrowed stock. Because of his recent success, Paulson is now their designated king. So it’s no surprise that he is finding himself the object of finger-pointing about who caused the mess we’re in. On November 13, Paulson and four other titans of the hedge fund world—Soros, Philip Falcone of Harbinger Capital Partners, Ken Griffin of Citadel Investment Group, and James Simons of Renaissance Technologies—were forced to answer questions in the glare of TV lights before the House Oversight Committee, chaired by Henry Waxman, a Democrat from California, the same man who dog-and-ponied tobacco executives into claiming under oath that cigarettes aren’t addictive. The five were selected because they were the highest-paid fund managers in 2007, as ranked by Alpha magazine, an industry trade publication. (View a slideshow detailing the falling fortunes of other hedge fund managers.) There has never really been a time when short-sellers have been feted. They had a brief moment in the sun following the corporate scandals of the early 2000s, when hedge fund manager Jim Chanos, among others, was credited with uncovering Enron’s fraud. Even though short-sellers red-flagged the dangers of subprime lending years before the crisis—Gradient Analytics, a research firm, issued private warnings as far back as 2002—they have received few brownie points since the housing bust began. “Everybody’s too busy looking out for themselves to come to the defense of people who are perceived as profiting from the misery of others,” Chanos says. In the view of many C.E.O.’s, short-sellers do more than just profit from corporate misfortune; they inflame it. C.E.O. Dick Fuld of Lehman Brothers and Alan Schwartz, former C.E.O. of Bear Stearns, in their own recent appearances before congressional panels, blamed rumormongers and short-­sellers for the demise of their firms. “The shorts and rumormongers succeeded in bringing down Bear Stearns,” Fuld ­asserted. “And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers.” Schwartz gave similar testimony when he appeared before the Senate Banking Committee in April, saying that there was a run on the bank despite a “capital cushion well above what was required to meet regulatory standards.” He testified that “market forces continued to drive and accelerate our precipitous liquidity decline.” Banking Committee chairman Christopher Dodd chimed in that “this goes beyond rumors. This is about collusion.”  But was it? Chanos, for one, is tired of the blame-the-shorts litany, and he recalls a conversation with Bear Stearns’ Schwartz to make his point. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "slideshows", "index" : "4"},"mediaType2":{"value" : "graphic", "index" : "6"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/slideshows/2009/01/Bosses-at-Ailing-Hedge-Funds","url2":"/graphics/2009/01/Tracking-Paulsons-Success-in-a-Weak-Market","url3":"/executives/features/2009/01/07/Goldman-Sachs-Alumni-in-Finance","url4":"/culture-lifestyle/culture-inc/arts/2009/01/07/The-Making-of-Money-Never-Sleeps","teaser1":"John Paulson may be thriving, but most of the other hedge fund kings are fading fast.","teaser2":"Even before the market turmoil of 2007, Paulson has been outperforming other indices.","teaser3":"Blankfein. Steel. Thain. Paulson. Kashkari. See a pattern? ","teaser4":"Fox hits up Hollywood A-listers to make a sequel to Oliver Stone's Wall Street.","headline1":"A Dying Breed","headline2":"Paulson's Winnings","headline3":"The Usual Suspects","headline4":"Get Me Rewrite, Rewrite, Rewrite","title":"More From Portfolio.com" }'); The day before the Fed’s rescue of Bear Stearns, Chanos says he was walking to the Post House restaurant in New York City, when, at 6:15 p.m., his cell phone rang. He saw the Bear Stearns exchange come up on his caller I.D. and took the call. “Jim, hi, it’s Alan Schwartz.” “Hi, Alan.” “Well, Jim, we really appreciate your business and your staying with us. I’d like you to think about going on CNBC tomorrow morning, on Squawk Box, and telling everybody you still are a client, you have money on deposit, and everything’s fine.” “Alan, how do I know everything’s fine? Is everything fine?” “Jim, we’re going to report record earnings on Monday morning.”  “Alan, you just made me an insider. I didn’t ask for that information, and I don’t think that’s going to be relevant anyway. Based on what I understand, people are reducing their margin balances with you, and that’s resulting in a funding squeeze.” “Well, yes, to some extent, but we should be fine.” “This is now 6:15 on Thursday night, the night before the collapse,” Chanos says. “It was after a meeting with Molinaro”—Bear Stearns C.F.O. Sam Molinaro—“who basically told him at that meeting, ‘We’re done. We’re gone. We need money overnight we don’t have.’  So here he is, calling one of his biggest clients to go on CNBC the next morning to say everything’s fine when clearly it’s not. And he knew it wasn’t.” Chanos refused to go on CNBC. By 6:30 the next morning, word was out that the Fed was engineering the rescue of Bear Stearns. Chanos realized that he could have been on CNBC while that was ­announced. “I thought, That fucker was going to throw me under the bus no matter what.” “So here it is,” Chanos says. “Alan Schwartz takes the position ‘Short-sellers were our problem,’ and who did he try to get to vouch for him on the morning of the collapse? The largest short-seller in the world. You want to talk about ethics and who’s telling the truth on these things? It’s unbelievable.” Schwartz, not surprisingly, has a different version of events. “I did not make the statements attributed to me by Mr. Chanos,” he says through a spokesperson. According to someone who has spoken to Schwartz, the ex-C.E.O.’s side of the story is that the conversation took place on Wednesday, not Thursday, and that it was entirely different from what was related by Chanos. His contentions are that the call was an effort to obtain a public statement from Chanos that “a group of short-sellers out there are trying to take Bear Stearns down” and that no information on Bear’s financial strength was conveyed to Chanos. Paulson is in his mid-fifties, hair thinning at the top just a bit, with a slight paunch that he fights by jogging in Central Park, a half-block from the 28,000-square-foot Upper East Side townhouse that he bought a few years ago. He is of medium height, medium build, medium disposition. He favors old-fashioned tortoiseshell bifocals and dark-gray suits—none of the forced informality that you find in some hedge fund offices. He speaks fluidly and candidly and is unmoved by critics of his chosen profession. This, after all, is a man whose mind has been set on making vast, historic amounts of money since he was a kid, when he bought candy in bulk and sold individual pieces to his buddies at a profit. At the beginning of 2008, he says, the general thinking was, No, we’re not going to have a recession; we’re going to have a slowdown. “Then there would be a pickup in the second half of the year. When the second half started looking as bad as the first, the general feeling became, We’re not going to have a pickup; we’ll have a slowdown.” Paulson is astounded that some optimists continue to expect that somehow the formerly unsinkable economy will remain afloat, at least long enough for the government’s rescue boats to arrive. “Now that we’re in a recession, they’re probably admitting, ‘Okay, we’re in a recession, but it will probably last just two to three quarters.’ So they’re always underestimating the severity of the magnitude,” he says. Paulson’s own view of the current situation is much darker. He predicts that the recession will last well into 2010 and that unemployment will reach 9 percent, a sharp increase from its current perch just below 7 percent. “We have a long way to go before we reach the bottom,” he says. Paulson has become a lightning rod not simply because he made money in an awful market, but because of the way he made it. He wagered against subprime securities while everyone else was piling in. He bet that in addition to Lehman Brothers, other banks like Washington Mutual and ­Wachovia were due for a fall. Long before the financial crisis hit, Paulson, according to one person briefed on the trade, invested $22 million in a credit default swap that eventually paid $1 billion when the federal government opted not to rescue Lehman Brothers. That amounts to a staggering $45.45 for each dollar invested. John Paulson was born in 1955 in Queens, New York, in a pleasant and somewhat obscure middle-class neighborhood called Beechhurst. His father, Alfred, an accountant who came from a Norwegian family that had settled in Ecuador, rose to become C.F.O. of Ruder & Finn, a public relations agency. But John’s investment-­banking genes seemed to have come from his mother’s father, Arthur Boklan, who, during the crash of 1929, was a banker at a long-since-vanished Wall Street firm. In an interesting parallel with his grandson, he apparently prospered even as the Great Depression dragged the country into misery. In 1930, according to census records, he was able to afford a $220-a-month apartment in the Turin, a stately building that still stands at 93rd Street and Central Park West in Manhattan.  Boklan saw to it that his grandson had an early appreciation for the principles of capitalism. When John was a small child, Boklan was the one who encouraged him to buy Charms candy in bulk at the supermarket and then sell the individual candies to kids in the schoolyard at a substantial markup. His profits grew, as did his appreciation for economies of scale and the tendency of certain commodities to become mispriced through ignorance or carelessness. It was also the point at which he would become transfixed by the process of turning pennies into dollars. Paulson would spend much of the rest of his career under the tutelage of older Wall Street role models, seeking to replicate those days with his grandfather. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "slideshows", "index" : "4"},"mediaType2":{"value" : "graphic", "index" : "6"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/slideshows/2009/01/Bosses-at-Ailing-Hedge-Funds","url2":"/graphics/2009/01/Tracking-Paulsons-Success-in-a-Weak-Market","url3":"/executives/features/2009/01/07/Goldman-Sachs-Alumni-in-Finance","url4":"/culture-lifestyle/culture-inc/arts/2009/01/07/The-Making-of-Money-Never-Sleeps","teaser1":"John Paulson may be thriving, but most of the other hedge fund kings are fading fast.","teaser2":"Even before the market turmoil of 2007, Paulson has been outperforming other indices.","teaser3":"Blankfein. Steel. Thain. Paulson. Kashkari. See a pattern? ","teaser4":"Fox hits up Hollywood A-listers to make a sequel to Oliver Stone's Wall Street.","headline1":"A Dying Breed","headline2":"Paulson's Winnings","headline3":"The Usual Suspects","headline4":"Get Me Rewrite, Rewrite, Rewrite","title":"More From Portfolio.com" }'); Following high school in Brooklyn, Paulson moved on to New York University, which in the 1970s offered a popular seminar taught by John Whitehead, then a senior partner at Goldman Sachs. Paulson listened, fascinated, as Robert Rubin, later secretary of the Treasury under Bill Clinton and now an unofficial adviser to Barack Obama—talked about the mysterious and new (to Paulson, anyway) world of risk arbitrage. At the time, the scholarly, soft-spoken Rubin was viewed, at least by Paulson’s professor, as the smartest partner at Goldman Sachs; he was certainly the richest. Paulson graduated first in the class of 1978, with visions of arbitrage in his future. Harvard Business School followed. There, Paulson came under the spell of another established star in finance, the leveraged-buyout titan Jerry Kohlberg. “I had never heard of Jerry Kohlberg,” Paulson recalls, “but one of my friends told me, ‘Forget about investment banking. You’ve got to hear Jerry Kohlberg. These guys make more money than anybody on Wall Street.’ ” According to Paulson, Kohlberg described how he engineered the L.B.O. of a company by putting up just $500,000 in equity and then obtaining a $20 million bank loan secured by the company’s assets. The company was turned around and sold at a profit of $17 million in two years’ time. Paulson received his M.B.A. and then spent his time in pursuit of as much money as he could earn. In 1980, the hottest jobs were not in investment banking but in management consulting. So when Paulson finished at Harvard that year, he joined one of the leading lights in the field, the Boston Consulting Group. Though the starting salaries were far higher than those in investment banking, he realized that even the partners didn’t manage to pull in the kind of money he was hoping for. Thus, following a chance social encounter with Kohlberg, Paulson moved to Wall Street, where he was introduced to Leon Levy of Oppenheimer & Co. Paulson was soon hired by Levy’s new venture, Odyssey Partners. After a couple of years at Odyssey, Paulson realized he was not getting the training he needed to climb the ­investment-banking money tree. So in 1984, just as the bull market was beginning, the 28-year-old joined Bear Stearns as an investment-banking associate. Four years later, he was promoted to managing director but soon opted to strike out on his own. After dabbling in real estate and beer—Paulson was an early investor in what would become the Boston Beer Co.—he joined the great, long march of former investment bankers and traders into the hedge fund business in 1994, going where he thought the money was. Paulson began with about $2 million of his own money, just a blip in the hedge fund world, even then. The firm consisted of just Paulson and an assistant. He shared office space in a Park Avenue building with other small hedge funds. At first, growth was slow. Paulson, who lived in an apartment in Lower Manhattan above what is now a discount shoe outlet, shepherded his money carefully and began to establish a track record. In keeping with the norms of the time, he charged a fee of 20 percent of profits and 1 percent of assets—a comfortable sum when the size of his fund was $20 million but nothing like what he has made recently. Then, in the late 1990s, came the tech bubble, and more important for Paulson, who was shorting stocks and betting big on corporate mergers, its bursting in 2001. When the market crashed after stocks lost steam that year, Paulson’s funds climbed 5 percent and rose the same amount in 2002, demonstrating his uncanny ability to avoid losing his investors’ cash as the rest of the market cratered. (Indeed, Paulson has had only one down year out of the past 15: His funds recorded a 4.9 percent decline in 1998, the year of the debacle in the Asian markets.) Money continued to pour in. By 2003, his funds had $600 million under management; two years later, their value was upwards of $4 billion. Paulson began branching out, moving away from betting on mergers and into the financial instruments of firms in bankruptcy. He was still as obscure as he could be, keeping his name and that of his wife, Jenny, out of the papers, though they did begin to accumulate the usual symbols of hedge fund wealth. He left his apartment on Broadway for the palatial quarters of a mansion on East 86th Street and bought an opulent, though not extravagant, house in the Hamptons, outside of New York City. Paulson got wind of the coming storm in the credit markets through the infallible barometer of prices. By 2005, the amount of money he could make on the riskiest securities was not enough to justify the risk he was taking. Pricing, in his view, made no sense. Paulson concluded that he could do better on the short side—wagering that prices of risky securities would fall. “We felt that housing was in a bubble; housing prices had appreciated too much and were likely to come down,” he says. “We couldn’t short a house, so we focused on mortgages.” He began taking short positions in securities that he believed would collapse along with the housing market.  The best opportunities were in the junkiest portion of the housing market: subprime. Pricing of subprime securities “was absurd,” Paulson says. “It didn’t make sense.” Subprime securities graded triple-B—in other words, those that the credit-rating agencies thought were just a tad better than junk—were trading for only one percentage point over risk-free Treasury bills. This absurdity appealed to Paulson as easy money. displayPromoModule ('{"moduleType":{"value" : "featuresModule", "index" : "1"},"mediaType1":{"value" : "slideshows", "index" : "4"},"mediaType2":{"value" : "graphic", "index" : "6"},"mediaType3":{"value" : "article", "index" : "0"},"mediaType4":{"value" : "article", "index" : "0"},"url1":"/slideshows/2009/01/Bosses-at-Ailing-Hedge-Funds","url2":"/graphics/2009/01/Tracking-Paulsons-Success-in-a-Weak-Market","url3":"/executives/features/2009/01/07/Goldman-Sachs-Alumni-in-Finance","url4":"/culture-lifestyle/culture-inc/arts/2009/01/07/The-Making-of-Money-Never-Sleeps","teaser1":"John Paulson may be thriving, but most of the other hedge fund kings are fading fast.","teaser2":"Even before the market turmoil of 2007, Paulson has been outperforming other indices.","teaser3":"Blankfein. Steel. Thain. Paulson. Kashkari. See a pattern? ","teaser4":"Fox hits up Hollywood A-listers to make a sequel to Oliver Stone's Wall Street.","headline1":"A Dying Breed","headline2":"Paulson's Winnings","headline3":"The Usual Suspects","headline4":"Get Me Rewrite, Rewrite, Rewrite","title":"More From Portfolio.com" }'); While Paulson was hardly the only fund manager to bet against subprime, he seems to have made the most money, most consistently, from the banking industry’s troubles. One reason for this is that Paulson was able to recognize and act on the unimaginable—that the banks, which took on most of the subprime risk, had no clue what they were holding or how much it was worth. Big banks like Merrill Lynch, UBS, and Citigroup held triple-A-rated securities, but these were backed by collateral that was subprime at best, making the rating of the securities almost irrelevant. “They felt,” Paulson explains, “that by having 100 different tranches of triple-B bonds, they had diversification to minimize the risk of any particular bond. But all these bonds were homogeneous.” It was like having 100 different pieces of the same poisoned apple pie. “They all moved down together.” What separated Paulson from the rest of the hedge fund crowd was his realization that nobody was able to value these complex securities. His advantage came when he was willing to admit that. Other traders refused to short the big banks because they couldn’t believe that such huge institutions would be so unaware of their own risks. Once that fact dawned on Paulson, he bet, fast and big, that the banks would fail. “We thought that many banks and brokerages were massively overleveraged, with very risky assets, and that a small decline in the assets would wipe out the equity and impair the debt,” Paulson says. He and his analysts knew that the banks were deep into subprime, and yet the prices of their debt securities hadn’t fallen, indicating that the rest of the market hadn’t caught on. By the end of 2007, he started to beef up his short positions, focusing on overleveraged financial institutions—Wachovia and Washington Mutual among them. And then there were derivatives. Since all that toxic waste on the balance sheet imperiled the survival of the banks, Paulson wanted to be sure he was prepared. So he bought credit default swaps, like the $22 million he bet against Lehman—essentially an insurance policy that paid off when Lehman’s bonds defaulted. Even though Paulson didn’t actually own any Lehman bonds, he made more than $1 billion on that bet. It’s as though he’d bought insurance policies on houses he didn’t own along the Indian Ocean just moments before the tsunami hit. Though the financial crisis has rewarded Paulson handsomely, he continues to search for investment opportunities. On October 2, he walked into a breakfast meeting at the J.P. Morgan Chase Tower, right across the street from his hedge fund’s old office on Park Avenue, to make a presentation to potential investors about a new fund he had started to trade distressed debt. Its name: the Paulson Recovery Fund. As usual, Paulson was calm and quiet. His associates described how Paulson & Co.’s funds had thrived during even the very worst declines in the market, with an annual growth rate of 17 percent since inception. Slides in Paulson’s presentation declared that the U.S. had slipped into its deepest recession since World War II. His charts displayed the usual parade of bad tidings: a steep decline in home prices, soaring mortgage delinquencies, credit contracting, and hemorrhaging in the financial sector. The 14th chart showed his strategy. It read, “How do we benefit near-term?” Paulson’s answer came in four bullet points: Cut leverage and build cash, eliminate exposure to the equity markets, maintain only short-term securities, and prepare for bargains in debt securities of distressed companies—a “$10 trillion opportunity,” another chart pointed out. Paulson has also taken steps that may help him avoid being tagged as a robber baron, donating $15 million to the Center for Responsible Lending to support a program designed to help homeowners avoid foreclosure. His congressional testimony on November 13 included his thoughts on how the government could help the banks get back on their feet—something that will of course benefit everyone, not just the holders of those distressed securities that Paulson is eager to buy. But it’s hard to see how any financier who made a fortune from market turbulence can improve his public image when the economy is in such serious trouble. George Soros, even with his massive philanthropic efforts to promote democracy in Eastern Europe, will probably go down in history as the man who broke the Bank of England. Traders like Paulson will probably never be popular. They might as well get used to it. Paulson himself remains unrepentant. At a recent lunch for investors at the Metropolitan Club in Manhattan, his clients dined on Colorado rack of lamb and sipped champagne, the recession be damned. Paulson, his wife, and their children still live in their home on East 86th Street, in a mansion that at one time was a men’s club. They also have a seven-bedroom, seven-and-a-half-bath estate with an indoor pool on Ox Pasture Road in Southampton, New York; he bought the house in 2006 for $12.75 million. This past April, Paulson apparently wanted a place that was larger than a mere bungalow for his growing family, so he listed the property for $19.5 million. At last look, it was still for sale; its asking price, which had been lowered at least twice, was down to $13.9 million. Evidently, John Paulson had bought at the top of the market. Related LinksLehman Europe and Prime Brokerage Counterparty RiskCDS Didn't Bring Down Bear and LehmanThe Shears are Out

In the aftermath of the stock market crash of 1987, reformers moved to remake America’s regulatory structure. Some experts proposed tinkering with the oversight agencies, merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, for instance. Others recommended regulating derivatives, which were in their infancy. George Soros, not yet the bête noire of right-wingers, took to the editorial page of the Wall Street Journal to warn that nobody was thinking big enough: “The longer markets function without supervision explicitly aimed at maintaining stability, the greater the danger of an accident like October 19, 1987.” Anyone remember the landmark 1987 Securities Act? It never materialized. And did anything happen in 1998, after Long-Term Capital Management nearly went under and a similar dance took place? Many of the same players strutted on the same stage, and Soros again predicted that without sweeping international regulatory reform, we risked “the breakdown of the gigantic circulatory system which goes under the name of global capitalism.” Again, no ’98 Securities Act—perhaps not surprising, given that what followed was a market recovery that we now know was a massive equity bubble. (View a graphic showing how investment vehicles escaped current regulatory measures.) In our current financial mess, hardly a day goes by without another hearing on the failures of the U.S. regulatory ­system or speech on regulatory affairs. In November, Henry Waxman, chairman of the House Committee on Oversight and Government Reform, hauled five of the most influential hedge fund managers before the committee and extracted pronouncements from each of them—some less full-throated than others—that the markets, including hedge funds, needed more regulation. Once again, there was George Soros, as right as ever, leading the Regulatory Light Brigade. This time, the calamity in the markets is more devastating than any of the previous crises since the Great Depression. Luckily, it’s looking like history won’t repeat itself. One of the enduring legacies of this economic collapse will be that the government finally had to embark on a wholesale financial rethinking. Right now, finding a way to end the crisis and reinvigorate the economy is the most pressing issue. But in a few months, after the Obama administration settles in—assuming we aren’t all eating cat food under a bridge—we are going to have the debate we need about how to rebuild the regulatory system. The pressure to put off this debate will be enormous. The financial industry is bound to resist. But Wall Street is at its weakest point in decades; the new administration has to strike while the public temper is at its hottest. “Investors have lost confidence in everything: the regulators, the system, the oversight of Congress, the fairness of our markets,” says Arthur Levitt, a former S.E.C. chairman. “How do you restore that?” One hopeful sign is that President Obama has given the matter significant thought. In a campaign speech in March, he talked about regulating the derivatives markets and raising the capital standards for banks. If that speech becomes the template for reform, it’s a promising start. It’s also promising that Gary Gensler was named co-head of Obama’s search team for a new S.E.C. leader. Gensler has been a prescient critic of excesses at Fannie Mae and Freddie Mac (which were not remotely the cause of the crisis but were inarguably pockets of systemic risk).  First, regulators need to change their ninnyish attitudes. They have gone about their jobs in the past decade like hall monitors at the prom, deeply afraid of being ostracized. They need to bring some mettle to their roles. The challenge is to remake the system so that it’s up to the task of preventing, or at least minimizing, the next global meltdown. Alter the structure all you want, but unless you have the right regulatory attitude, it’ll be for naught. This is not a moment to think small. First, we raze the S.E.C. and the C.F.T.C., along with most, if not all, of the federal banking and state insurance regulatory structure. We should strip the Federal Reserve of its responsibility for regulating banks; it’s enough to oversee the economy. And just as everyone was trying to express how bumbling and irrelevant the S.E.C.’s enforcement approach has been, the agency provided perfect examples. In mid-November, headlines blared that the S.E.C. had charged Mark Cuban, the billionaire owner of the Dallas Mavericks and a frequent blogger, with insider trading. Did he gain secret knowledge of the failure of A.I.G. and sell his stake? Had he done something untoward with regard to Lehman Brothers? No. Four and a half years ago, Cuban sold stock in a company called Mamma​.com based on inside information, according to the S.E.C., and thereby avoided $750,000 in losses. Today, Copernic, Mamma​.com’s successor, sports a market value of less than $3 million. Cuban may well be guilty. But who cares? It’s as if Homeland Security had a ceremony in 2008 to announce that it had erected a gold-plated bollard at ground zero. And come December, it became clear that the S.E.C. had shockingly botched multiple chances to upend confessed Ponzi schemer Bernie Madoff. Before the economic crisis became acute, Treasury Secretary Hank Paulson put forward his plan to remake the regulatory system. Like most of Paulson’s initiatives, it was inadequately explained and poorly sold. And the motivation was exactly wrong, born of a fear of regulation that looks ridiculous today. It died on arrival, as it should have. But surprisingly enough, given the dubious way it began, a Paulson-like framework is a good place to start. It was influenced by what is known in regulatory circles as the Twin Peaks approach, used in Australia and the Netherlands. The idea is to create two financial regulators that are given separate responsibilities not based on financial firms’ lines of business. Currently, we have separate regulators for securities, futures, banks, and insurance. That antediluvian division of labor needs to be scrapped. Under a Twin Peaks structure, one agency would focus on the safety and soundness of financial institutions: the strength of their balance sheets, whom they trade with, and how strong their risk controls are. An agency with this structure would remedy one of the glaring limitations of the S.E.C.—that it has too many lawyers and too few market experts. The second peak will be more familiar. It would focus on business conduct and investor protection, otherwise known as lying, cheating, inadequate disclosure, and manipulation. This would encompass much of what the S.E.C. is currently supposed to be doing. It would go after big targets and not monkey around with dinky companies and small-time ­insider-trading issues. The Twin Peaks model has good-cop, bad-cop appeal. The safety-and-soundness regulator can work with firms to make sure they are solid or else the enforcer will come in. And we should consider a third peak as well: one with responsibility for surveying systemic risk. It would monitor the safety and soundness of the entire financial system, rather than assess it on a company-by-company basis. One debate—sometimes drawn as a Europe-vs.-U.S. argument—is about whether we should reorder regulation based on broad “principles” rather than strict “rules.” This is a red herring, despite the energy expended on it. Rules come from principles, after all. Whatever we have, it needs to be enforced.  In remaking the regulatory architecture, we will need to update the regulatory mandate to deal with 21st-century financial products. Accounting rules should be tightened to prevent anything from being moved off the balance sheet unless there is a true sale of the assets. No entity or instrument should be untouched by some form of regulation. Regulators need to monitor positions taken by banks, other financial institutions, and major investors, including hedge funds. To its credit, the S.E.C. did attempt in recent years a modest hedge fund registration requirement. The courts struck it down. Congress will have to expand the regulatory mandate to include private investment partnerships, or at least those of a certain size. Clearly, the regulators will need new powers. We must install higher capital requirements for all financial institutions. Given the disastrous incompetence of the rating agencies, Congress will have to undertake the enormous task of decoupling our regulatory framework from its dependence on ratings. Right now, ratings are written into the fabric of thousands of laws and regulations. Instead, market prices should be used. There is wide consensus, as there should be, that derivatives will be brought under the umbrella. In the 1990s, the definitive fight was over the regulation of derivatives. Brooksley Born, then the head of the C.F.T.C., pushed to regulate them. Alan Greenspan, Robert Rubin, and Lawrence Summers fought her. She was right. It’s encouraging that people like former S.E.C. commissioner Levitt, who sided with the crowd that argued that regulation would plunge the market into legal chaos, are now having second thoughts. Let’s hope the same is true for Summers, who is now in Obama’s inner circle. “I have regrets that I didn’t use that as an opportunity to say, ‘Wait a second, maybe it will create uncertainty, but what about going forward? And what about mandating a clearinghouse?’ ” Levitt says. “I could have and should have, and I regret not doing it.” Other problems are thornier. Can we do something about outrageous compensation for executives and Wall Street? Can we prevent institutions from becoming too big to fail or, worse, too interconnected to fail? Right now, unfortunately, regulators are encouraging mergers, giving us a land of one-eyed institutions buying blind ones. They have to be followed by a complete re-thinking of our capital requirements. Stronger capital requirements might help with excessive bonuses too. They will make financial firms more stable, less profitable, and therefore more parsimonious with their own employees in order to leave more for shareholders. But a revitalized regulatory sector won’t be enough. We need more dissidents. We need to make the world a safer place for short-sellers to criticize companies. Regulators should publicly praise short-sellers, rather than periodically ban their activities. Critics and whistle­blowers, no matter how self-motivated, should be regularly consulted about suspicious companies, not dismissed as cranks once they expose wrongdoing. And then we need to bring back plaintiffs’ lawyers. In the past decade and a half, Republicans not only weakened regulation but also led an attack on these lawyers. Corporate America hated them—and why not? They seem like parasites, ready to pounce on every corporate mistake. But they are vital to keeping capital markets functioning because they keep boardrooms scared. Frank Partnoy, a University of San Diego law professor and prescient critic of the fragile financial markets, says that “it’s crucial that standards not stand alone and they be enforced with real teeth. We need public enforcement and private litigation.” The current catastrophe presents us with an opportunity. But the Obama administration and a Barney Frank-led congressional effort have to be aggressive and ambitious. Reforms can always be scaled back if they overshoot the mark. But the reform-minded cannot enter the debate in a defensive crouch. As new chief of staff Rahm Emanuel says, Don’t let a crisis go to waste. Related LinksSign of a Bottom?The Man Who Made Too MuchThe Shears are Out

With the inauguration of President Barack Obama, you might be forgiven for thinking that the campaign is over. But in Washington, a barrage of political ads still crowd the airwaves. One, sponsored by a conservative outfit named Americans for Job Security, features grainy and menacing footage of leading Democrats like Nancy Pelosi and Chuck Schumer. A narrator intones, “Democratic leaders want to deny workers the right to a secret ballot in union-organizing elections. Maybe it’s a payoff to the union bosses.” Another, sponsored by American Rights at Work, a pro-labor group, shows a surprised office worker meeting with his supervisor, who gleefully informs him, “We’re giving you health benefits, a pension, and a nice big raise.” Alas, the worker wakes up. “If you think this is going to happen by itself, you’re dreaming,” the narrator says. The ads set the stage for what will most likely be the first major confrontation between the Obama administration and business—and it could get ugly. At stake is the Employee Free Choice Act, which would make it much easier for unions to organize. The bill is a top priority of the labor movement, and since labor helped get Obama elected, it expects the bill to become a top priority for him too. Obama has been cheered by many in the business community for appointing moderates like Tim Geithner to Treasury and Larry Summers to the National Economic Council. The new president, notably, hasn’t brought many labor-affiliated economists and activists onto his economic team. But what is about to play out in Washington will no doubt be an early reminder that despite Obama’s good intentions and promises of a kumbaya era of coming together, he won’t be able to sidestep the classic conflict between business and labor. The U.S. Chamber of Commerce is calling the coming war over the bill “Armageddon.” Such corporate titans as former General Electric head Jack Welch, outgoing Wal-Mart C.E.O. Lee Scott, and Home Depot co-founder Bernie Marcus are denouncing it. At the World Business Forum, Welch was apoplectic: “If business leaders are not aware of this terrible piece of legislation, they should be. It would hurt us dramatically in our ability to be competitive globally.” Political veteran Mark McKinnon, a former media adviser to George W. Bush, says he’s “never seen business this fired up.”On the other side, Andy Stern, president of the Service Employees International Union, tells me the legislation “is essential for workers to be able to share in the wealth of their employers.” Stern matters, and he will continue to matter during the Obama administration. With 2 million members, the S.E.I.U. is the largest and fastest-growing union in North America, and its endorsement of Obama gave the first-term senator’s campaign a big lift during the Democratic primaries in 2008. There is no question that Obama favors the bill; he was one of its many co-sponsors in the Senate. But now he has to make a choice. If Obama wants the law, he can get it passed, but he’ll have to fight for it—and spend valuable political capital early in his term—when he has other priorities, like pushing health-care reform, clean-energy efforts, and an economic-stimulus measure. In 2007, the E.F.C.A. was passed by the House but was filibustered in the Senate and did not pass. This time, though Democrats enjoy a larger majority in the Senate, some in the caucus—especially new senators from conservative states, like Mark Begich of Alaska—might not stand up against a Republican filibuster. Transition officials were divided on how aggressively and quickly Obama should move on the bill, but sources close to the campaign tell me he will push ahead. I’ve often been a critic of unions, but on this issue, I support them and think Obama is right to move forward. The central argument in favor of the bill is that it puts workers on a more level playing field when it comes to organizing unions. Right now, under federal law, a union can be certified to represent workers in two ways. The first is if a majority of workers sign cards saying they favor joining a union. The second is if, in a secret-ballot election, a majority of workers vote to organize. Under current law, an employer can demand a secret-ballot election even if a majority of workers sign cards. Under the E.F.C.A.—also known as “card-check” legislation—employers wouldn’t be able to demand an election. They would have to recognize the union after the cards were signed. Thus, the bill would take the choice out of management’s hands and give it to the workers. If workers wanted a secret-ballot election, they could have one. If they wanted to just go with card check, they could do that. Passing the card-check bill will surely help unions be certified more easily. But boosting union membership won’t be a slam dunk. Corporations, which have had the upper hand in keeping unions out of their shops, will still have many tools at their disposal to thwart them. They can hold meetings on company time advising against union membership and launch full-scale campaigns to prevent workers from joining.If card check becomes law, it won’t restore unions to their glory days—today only 7.5 percent of workers in the private sector belong to unions, less than half the number 25 years ago—but it might arrest the decline, which isn’t bad for business in the long run. No less of an authority than Ben Bernanke has said that the drop in union membership explains a good 10 to 20 percent of the increase in income inequality in the United States. If businesses want people to be able to afford their products, union membership itself serves as an economic-stimulus package—a surefire way to put more money into workers’ pockets.In the end, no one knows what the exact effects of card check would be. Union membership would surely rise, but the economic dislocation could be minimal. Most of the job losses in the United States fall disproportionately in industries with unions. If the bill becomes law, it will certainly lead to a flurry of organizing, but it won’t be easy for labor to hold on to even its meager 7.5 percent of jobs.God knows it’s easy to bash unions. The American auto industry is on its knees in no small part because of legacy costs brought on by the demands of the United Auto Workers, which agreed in December to a package of givebacks. But being anti-union is as boneheaded as being anti-corporation—a knee-jerk reaction when nuance is required. After all, unions are found not only in dying industries but in growth industries like aerospace, energy, and entertainment. Private equity giants, already struggling during the economic crisis, will face further challenges should the E.F.C.A. pass. When private equity firms bought such businesses as Toys R Us, Hilton Hotels, Dunkin’ Donuts, and Hertz, they surely didn’t plan on having to face substantial unionization drives, but shortsightedness has been in no short supply in boardrooms around the country. While the Private Equity Council, the Washington lobby for the big private equity firms, hasn’t taken a position on the E.F.C.A., individual members have. The Carlyle Group has been in a big fight with the S.E.I.U., which is trying to organize workers at HCR ManorCare, a company with nearly 60,000 employees in 32 states running more than 500 long-term-care facilities. Carlyle closed its $6.3 billion purchase of the company in December after overcoming concerns from regulators and efforts by the S.E.I.U. to delay the sale. There’s no reason workers should have to get the short end of the stick just to save the private equity guys from being inconvenienced.The legislation doesn’t apply to small businesses, so the corner grocery probably won’t face an organizing drive. And as for larger companies, it’s worth noting that many corporations have chosen not to fight card check and have honored union expansion without calling for elections, which are often bitterly fought. These include Harley-Davidson, Aetna, and AT&T. Some Republicans have recognized this. Indeed, a Republican, George Pataki of New York, became the first governor of either party to sign a card-check bill, hailing it later as “an important step toward eliminating unnecessary hurdles while also ensuring fairness.’’ Sounds right to me. Related LinksFinally, Drama! A Geithner vs. Bair Clash?Ben Stein Watch: November 30, 2008Obama's Economic Team

Sales of Amazon’s Kindle shot up during the holidays, encouraging the makers of other e-readers to believe that the market will grow if they keep pushing the right technology. One firm that’s trying is Plastic Logic, an upstart with $200 million in funding from Intel, Siemens, and others. Betting that lightweight plastic is the answer, the Mountain View, California, company is developing a reader that will curl like a piece of paper and to which books, periodicals, and office documents can be downloaded via WiFi. A prototype of the fully flexible reader is still a few years away. In the meantime, Plastic Logic’s first model—a rigid one—will be out this spring. (View an interactive feature about gadgets that have failed to to sell well). Related LinksLast Bytes: Next Up, CESFirst Bytes: Intel, Accel Partners, CBS, Tumblr, YouTubeReally Late Breaks: A Bad Day for Media

In one of the most memorable moments in cinema, a middle-aged businessman whispers to a young and perplexed Dustin Hoffman one word of advice: “Plastics.” In a 21st-century remake, the word might one day be algae. Plastic was the new gold when The Graduate was filmed in the 1960s. In the summer of 2008, as oil prices soared to frightening levels, dozens of little companies managed to bring in a sudden gusher of funding for a technology that has long been relegated to the fringe of alternative energy: turning the green scum that grows in ponds and waterways into fuel. In just six months, investors pledged more than $1 billion to 30 or 40 algae-fuel companies, many of them new. Now with oil prices less than half of what they were in the summer, the fledgling algae industry isn’t likely to see more big investments anytime soon, and the credit squeeze will also hamper development. But the companies hope they’ve raised enough cash to move the technology to the next step and prove that the watery weed can be a viable alternative to petroleum. The fact is, algae contains an abundance of natural fatty oils that don’t need much refining to power cars and jets. Nevertheless, making algae into a cost-effective fuel source remains a highly speculative venture. The process has been tried only on a small scale; so far, just a few thousand barrels of fuel have been made from algae. Large-scale cultivation takes place in huge metal tanks or open ponds. According to a 2004 University of New Hampshire study, the pond method would require 30 million square acres—an area equal to the size of South Carolina—to grow enough algae to satisfy the U.S.’s transportation needs. Whatever process is used will require the building of massive new infrastructure for water management, feedstock supplies, nutrients, and transportation, even if algae oil can be refined at existing facilities. If algae companies can’t increase production while maintaining prices that can compete with petroleum’s, they will fail. Still, the prospect of replacing petroleum with a plant-based fuel that has a high energy yield compared with other plants has led some major investors to take the algae plunge—including Bill Gates, whose venture fund Cascade Investment pledged a reported $50 million to Sapphire Energy, a San Diego startup, in a financing round completed in September 2008. The Rockefeller family’s Venrock Associates fund has also made a substantial investment in Sapphire, and the company has attracted other blue-chip venture funds, including Arch Venture Partners and the V.C. arm of Britain’s huge life-science nonprofit the Wellcome Trust. “We are investing in this because algae is basically the most efficient photosynthetic process on the planet,” says Arch’s Kristina Burow. In the fall, the U.S. Department of Energy’s National Renewable Energy Laboratory in Golden, Colorado, launched a $200 million effort to fund innovative biofuel technologies and projects, including some using algae. Barack Obama mentioned algae several times on the campaign trail, and his advisers expect algae will play a role in his administration’s plans for a massive infusion of federal money into alternative fuels. If it does, the money might come just in time to offset the recent fall in oil prices and credit crunch, which could otherwise imperil algae’s prospects. Meanwhile, GreenFuel Technologies of Cambridge, Massachusetts, is developing a system that would use a coal plant’s carbon dioxide emissions as a carbon source to feed algae that would be converted into fuel. Near South Padre Island, Texas, PetroSun is converting a shrimp-research facility into an algae pond. Big oil companies like Chevron are also committing resources to pond scum. “Algae still needs to be proven at scale,” says Chevron spokesman Alex Yelland, “but we have a real sense that this will seriously augment the world’s biofuel supply in the future.” One sunny afternoon in South San Francisco, I find myself investigating the nascent algae revolution from behind the wheel of a Jeep running on biodiesel made by Solazyme, an algae-fuel company founded in 2003. The ride and feel are no different from those of a gas-powered car—no green smoke from the exhaust pipe. In the passenger seat is Harrison Dillon, Solazyme’s co-founder and chief technology officer. Before we start the engine, the other co-founder, C.E.O. Jonathan Wolfson, shows me a liter of algae fuel—a clear, slightly viscous liquid that he says is the first algae diesel to meet the highest standards of ASTM International (formerly the American Society for Testing and Materials) for use in engines. The company also recently had its algae jet fuel ASTM-certified.   Wolfson and Dillon won’t say how much their green crude costs to make or how the company—which recently closed on a $50 million funding round and cut a major deal with Chevron for an undisclosed amount in January 2008—plans to go from the few thousand gallons in its warehouse to the millions needed to satisfy even a tiny fraction of the U.S.’s yearly oil habit of 7 billion barrels. “The problem with algae isn’t so much the science,” says David Kurzman, an independent biofuels analyst, citing the challenge confronting most alternative fuels. “It’s developing what has to be a major industrial process and whether this is cost-effective.” When Wolfson and Dillon co-founded Solazyme, oil was selling for $25 a barrel, and the company struggled to find investors. A few years earlier, the Department of Energy had abandoned an algae-fuel program because it expected the fuel to cost consumers more than $4 a gallon. “We were sure we could make oil more cheaply than this and that algae would be big one day,” Wolfson says. The impact of plunging oil prices on the viability of algae fuel is unknown. Wolfson believes that his company will hit its goal of producing a barrel of algae oil for between $40 and $80 in the next two to three years. (At press time in mid-December, petroleum crude was at $44 a barrel after rising to more than $147 in the summer.) “Unless oil falls to under $40 a barrel, we think we will be competitive,” he says. Jason Pyle, C.E.O. of rival Sapphire, says he’s aiming to make a barrel of algae oil that could be priced at about $60. The truth is, no one really knows what’s possible. Algae is only one of many crops that entrepreneurs hope will challenge petroleum, which remains subject to fluctuations in both price and supply as cartels talk of cutbacks and oil-producing regions remain politically volatile. Money has also poured into ethanol and biodiesel made from so-called first-gen biofuels such as corn, soy, and sugarcane. In fact, $1 billion in private investment for algae is small change compared with the billions of dollars in investments and congressional subsidies that have been aimed at these terrestrial biofuel sources, from which more than 9 billion gallons of ethanol were produced in 2008, an increase of 28 percent from 2007. But most scientists contend that algae fuel—from cultivation to consumption—has a smaller carbon footprint than other biofuels, though no one will know for sure until algae-fuel production is ramped up. By the barrel, algae fuel provides three to four units of energy for every one unit used to make it, a ratio that approaches petroleum’s golden 5-to-1 level of efficiency. Corn’s ratio is a mere 1.2 to 1, according to some studies. That’s a paltry net output for a crop that, given the spike in global food prices this past summer, is already a controversial energy source. Cellulosic plants like switchgrass also score better than corn, having a 2.5 to 1 ratio. In the wake of the energy crisis in the 1970s, the Department of Energy spent hundreds of millions of dollars investigating the fuel potential of algae and other plants, but it dismantled the program in 1996. Since then, scientists have continued to work with algae to better understand its genetics and how it produces oils. “It’s hard not to get excited about algae’s potential,” Paul Dickerson, chief operating officer of the Department of Energy’s Office of Energy Efficiency and Renewable Energy, told the first Algae Biomass Summit, which was held in San Francisco in 2007 and attracted 350 scientists, technologists, entrepreneurs, investors, oil company representatives, and policymakers. In Solazyme’s headquarters, Wolfson shows me labs filled with flasks of goo ranging in color from lime to forest green. The company’s scientists are testing different species of algae in search of optimal ones, both natural and bioengineered, for extracting oil. More than 30,000 algae species exist, but only a few hundred have been studied. Solazyme produces its raw algal material in huge metal fermentation tanks through a process that Wolfson says can rapidly generate large amounts of biomass. Inside the vats, algae is bathed in sugars in a pressure- and heat-controlled environment. It’s a little bit like making beer, Dillon says. To produce millions of barrels of algae crude, however, this method would require heaps of sugar and cellulosic material as well as a vast area to house the vats, which themselves could be challenging to build and maintain. About 500 miles south of Solazyme’s headquarters, San Diego-area startup Sapphire Energy—the algae firm that won Bill Gates’ backing—is betting on the open-pond method, taking advantage of sunlight, which is directly converted into lipids, algae’s oily store of energy. The company claims that it can refine its open-pond algae into not only diesel but also high-grade gasoline—an industry breakthrough. Sapphire executives are staying mum about this method. Pyle says only that it makes use of sunlight, algae, and bioengineering. Sapphire is building a 20-acre pilot farm in New Mexico to experiment with scaling up, he adds. The open-pond system is currently more expensive than one using fermentation tanks, says Department of Energy biofuels expert Fred Gerdeman. And expanding production from a few greenhouses and pilot ponds to the millions of acres of ponds required to make even a modest dent in the world’s consumption of fossil fuels would pose a considerable challenge for Sapphire and other open-pond advocates. Gerdeman believes that both enclosed-tank systems and open ponds will be part of the mix in a future algae-fuel industry. Within five years, Sapphire aims to be producing 10,000 barrels of algae oil a day. By 2022, it hopes to reach 200,000 barrels a day—about what an offshore oil platform produces. By comparison, Chevron’s worldwide operations produce about 2.5 million barrels a day. Sapphire aims to raise $1 billion to fund the expansion. “We want to build an oil company,” says Sapphire backer Burow. “This is not just a short-term play.” Related LinksFuels of the FutureChevron Responds Running on Empty

You didn’t have much shelf life as a studio executive. You’ve been criticized for putting only two movies (Lions for Lambs and Valkyrie) into production at U.A. How do you respond? Look, I don’t pay any attention to critics. I know who I am. I know what I did. Those 18 months at U.A. were about putting together a management team, building an infrastructure, securing financing, creating a label, and creating a development slate with top talent. I’m really proud of that. You still own a piece of U.A. Will you and Tom Cruise collaborate in the future? Absolutely. We are talking about four or five pictures together. How are Wall Street’s troubles affecting Hollywood? Fewer movies will be made. And I think that’s good. Every single ­weekend, movies are cannibalizing themselves. We’re in an era now where less is more. Make fewer movies. Make them better. If fewer movies are going to be made, you’ll be affected too. Will you be forced to change course? I have been strictly in the movie business, but now I’m looking at crossover. The industry needs brands. I’m looking at theater. I have things I’m not ready to announce. You were the third female talent agent at Creative Artists Agency and the second to have a child. What pressures did you face? A woman had to be far better. When I got pregnant, I didn’t tell anyone until five months in. I worked until 7 p.m. on a Friday, went into labor on Saturday, and had a C-section on Sunday. On Monday morning, I was making a deal from the hospital bed. What else have you been up to since you left U.A.? I read medical books as a hobby. I love the New ­England Journal of Medicine. If I start to get stressed, I pick up a ­medical book and I feel a lot better. Really? Why? I’m always analyzing cause and effect. And I’m fascinated by lon­gevity. Somebody said to me, if you can make it through the next 20 years, you can live to 120. Looking back, were you surprised when you heard that Viacom’s Sumner Redstone fired Cruise in 2006? I don’t look in the rearview mirror, except to adjust my makeup. That’s a joke!  Related LinksSuddenly, Death Race Must Outrun A LawsuitTom Cruise/UA Secures Its $500 Million In FundsSalaam, Hollywood!

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