Whenever I am in the United States, I find myself lingering in bookstores, what my friend Joseph Epstein calls “the intellectual equivalent of pool halls.” In Princeton, New Jersey, when visiting my parents, I like to stop at the college U Store, actually a co-operative, where my membership card shows a presumably erudite Bengal tiger. (To which eating club does he belong?) There I inspect the required reading for various courses, figuring what’s good for a Princeton undergraduate is good for me.
In New York City, I drift toward Borders at 57th and Park Avenue, which has a huge collection of military, American, and world history. How they can afford to carry inventory that includes histories of Turkmenistan is beyond me. I am grateful to replenish there the tanks of what I call “readable Roman histories”: that is, books about classical history where all the footnotes are not in Latin or Greek. If I have time and energy, I make a pass at the Strand, the Greenwich Village used book loft, where the shopping bags make claim to its 12 miles of books, most of which, I sometimes think, were written by Salman Rushdie. (A good friend of mine actually went to university with Rushdie, who enjoyed the same unpopularity, although for different reasons, on campus that he does in the Arab world. In fact, in a show of their affection, his classmates formed a Page Ten Club, open for all those who failed to get past page 10 in the Rushdie’s novels. The other 450 pages are on sale at The Strand.)
For all that I enjoy book browsing, I end up shopping for essentially the same books year after year. For the children I buy what in the trade is known as young adult fiction. Authors like Joan Aikin or Rosemary Sutcliffe come to mind. For my wife, I gather up the latest contemporary fiction, provided it is below the radar of Oprah’s Book Club and does not have an appendix of questions that can be discussed at reading groups (as in: “Is there any indication that Richard Parker, the main character in Life of Pi, ever attended Princeton University?).
For myself, I divide my purchases between biographies, European and American history, Yankeeography (accounts of the New York Yankees), battle memoirs, and classical fiction, although with novels I tend toward financial realism—Dreiser, Howells, and Balzac are among my standbys—as opposed to Latin American fabulism (when it comes to Pablo Neruda, include me out). But most of my reading is connected to specific places, and my dream gift would be an atlas that showed the best books—fiction or non-fiction—that could be read in various cities or countries. For example, in the last year I have loved reading “Rubicon” by Tom Holland in Italy, “Mary, Queen of Scots” in Edinburgh, and “The Beleaguered City” by Shelby Foote in Vicksburg, Mississippi. I would boast of some other highbrow reads, but then my wife might reveal that on my bedside table is an account of the 1986 Mets, entitled “The Bad Guys Won.”
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One book that has eluded me for years is a readable economic history of the United States. I have lots of histories on my shelves that are unreadable, beginning with Charles A. Beard’s “An Economic Interpretation of the Constitution” and including some old textbooks about the Second Bank of the United States and the Texas Railroad Commission. But in recent weeks I have read with great appreciation a new book by John Steele Gordon, “An Empire of Wealth: The Epic of American Economic Power.” Gordon writes a regular column, The Business of America, for “American Heritage” magazine. Even if in his column and books he celebrates the achievements of American businessmen, it would be wrong to dismiss him simply as an acolyte of capitalism—leaving aside that his last column sings the visionary praises of one John D. Rockefeller. (His point there was that since wells were drilled in Titusville, Pennsylvania in 1859, doomsayers have been wringing their hands that we’re running out of oil.)
Published by HarperCollins and with an elegant book jacket from a Thomas Hart Benton painting, “Empire of Wealth” tells the narrative of the American economy from the Jamestown settlement to the Internet revolution, noting the many successes (such as the cotton gin and telegraph) and the occasional failures (Herbert Hoover is quoted: “The trouble with capitalism is capitalists. They’re too damn greedy.”). Gordon’s thesis is that in the great initial public offering that is American history, a genius for new products and markets (from mills to assembly lines and e-mail) has expanded the economic frontier. By contrast, in the novels of Theodore Drieser, the typical robber baron-protagonist corners a grain or trolley car market only to unravel in the arms of a chorus girl. In Gordon, however, pluck and luck usually win out over Warren Harding’s cronies or Daniel Drew’s “watered stock” (cattle readied for market with salt and then lots of water).
A pleasure of reading Gordon is that he writes with energy and precision, and he has a love of historical words and obscure facts. Thus in telling the epic of American economic power, he slips in numerous linguistic origins. For example: The word cowboy “was first applied to the black slaves who herded cattle in colonial Carolina.” Jefferson coins the word “dime” and popularizes the idea of “cents.” “Those who invested money in an enterprise were called adventurers, a word that is still echoed today in the term venture capitalist.” The word “dollar” comes from the German “Thal,” which means valley and gave its name to a productive Bohemian silver mine, which later issued much sought-after coins (‘thalers’ became dollars). “A Scottish engineer named John McAdam, in the early part of the of the nineteenth century, would perfect the technology of road building using layers of stone and gravel and give his name (slightly misspelled as macadam) to the process…” The term civil engineer evolves because until the 1750s most engineers worked for the military. The “right whale” was the one that “was easy to catch, and floated when dead.” James Gordon Bennett, founder of the New York Herald, first coined the word ‘leak’, in the 1830s, to describe “stories slipped to reporters by politicians for their own purposes.” Thomas Edison invented the world “hello.” The word “debugging” literally comes from the insects that got into the vacuum tubes of early computers and made them run poorly.
As recounted in Gordon, the story of American capitalism is a triumph of native invention. Colonists and pilgrims arrive in what one Puritan calls “a howling wilderness,” cultivate gardens full of corn, tobacco, and wheat, circulate currencies of convenience, establish banks and stock markets, mechanize farms and factories, lay railroad track, welcome immigrants, endure the odd panic or recession, grow rich on foreign wars, and finally bestride the world’s markets with iPods and Wal-Mart. Near the conclusion he writes: “The late 1990s in the United States were the greatest period of wealth creation in the history of the world.” But it is a period of economic growth that has antecedents, for example, in the railroad industry, which in 1830 had, nationwide, 23 miles of track and which, by 1860, had laid down 30,626 miles of rail.
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If Gordon’s book were only an invitation to celebrate the Robber Barons’ Ball, it would not be worth plowing through its 419 pages. But where the argument becomes more subtle and provocative is in his perspective on the history of American money and banking. Because the US was founded in a new world without trade guilds or Venetian banks, its financial markets started nearly from scratch. Since the drafting of the constitution, the argument about monetary policy has defined many of the fissures in the country’s political and economic debate.
In the last almost two hundred and fifty years, the nation has failed to reach agreement on whether the success of American enterprise is a tribute to efficient, self-correcting markets, inventive genius, and hard work or whether the American economy is a succession of rigged markets, government bailouts, and inside trades. For example, the 1824 Supreme Court decision, “Gibbons v. Ogden,” is described as the “Emancipation Proclamation of American Commerce,” in that it freed interstate commerce from local, state-enforced monopolies. But the historian Charles Francis Adams, as quoted in Gordon, describes an earlier-day Enron, Crédit Mobilier, as follows: “The members are in Congress; they are trustees for the bondholders; they are directors; they are stockholders; they are contractors; in Washington they vote the subsidies, in New York they receive them, upon the plains they expend them, and in the ‘Crédit Mobilier’ they divide them.”
Many arguments about the nation’s concentration of wealth have been focused on whether the United States needed a national bank and a single currency. One reason no one liked the economic consequences of the Continental Congress or the Articles of Confederation is that financial markets were multi-ring circuses, giving rise to the phrase “not worth a continental,” to denote worthless paper currency. During the drafting of the Constitution and the George Washington presidency, Alexander Hamilton supported the creation of a quasi-national bank (although the government would only hold 20 % of the shares), and his redemption of near worthless revolutionary war bonds, at par, is an example either of early monetary prudence and the first step toward a sound national currency, or a scam worthy of the 1980s savings and loan bailouts or the taxpayer subsidies for Chrysler and Long-Term Capital Management. Opposed to the Federalist national bank were the Arcadian visions of Thomas Jefferson, who believed that “banks are more dangerous than standing armies,” and who saw the U.S. economy as a variation on a landscape painting—the province of yeomen and village markets, not bankers on bended knees to kings and princes.
Hamilton got his Bank of the United States, although it disappeared in 1811, and later Andrew Jackson shuttered the Second Bank of the United States. Nor did the U.S. get a true central bank until 1913, when the Woodrow Wilson administration created the Federal Reserve Bank and its regional branches. Gordon writes: “Thomas Jefferson, one of the most brilliant men ever to live, was psychologically unable to incorporate the need for a mechanism to regulate the emerging banking system or, indeed, banks at all, into his political philosophy.” For most of the nineteenth century, without an instrument either to regulate banks or the liquidity of the financial system, booms and busts were an inevitable part of the laissez-faire system. Gordon concludes that: “bank failure, thanks in large part to Thomas Jefferson and his political heirs, was to become as American as apple pie.”
During this period of frontier capitalism, banks were local affairs, closer, in today’s terms, to Web sites or supermarkets than branches of Bank of America. Gordon writes: “Still others were known as wildcat banks because their headquarters (the only place their notes could be redeemed for gold and silver) were located ‘out among the wildcats’ where they were, quite deliberately, hard to find.” In addition, it was the banking system, not the U.S. Treasury, that was responsible for the circulating currency. “In the 1850s,” Gordon describes, “there were more than seven thousand kinds of more or less valid banknotes in circulation and more than five thousand that were fraudulent or counterfeit.” Actually as early as 1690, the American colonies had created paper money. Warehouse receipts, indicating crops held in storage, functioned as early money. Bank drafts were cut in half, into quarters, and then eights (hence “pieces of eight”). Later goldsmiths floated vouchers that could be redeemed for gold. At the outbreak of the Civil War, Gordon recalls, “the number of paper money issues in circulation numbered in the thousands and created a monetary cacophony quite as bad as the colonial hodgepodge of bits of foreign coins, warehouse receipts, and provincial letters of credit.”
* * *
It took the Civil War for the United States to adopt a national currency. A run on confidence after the engagement at Fort Sumter sent American gold to vaults in London and Paris. President Lincoln had no choice but to detach the Northern economy from the gold standard. He noted wryly that “the bottom is out of the tub” as he watched the country’s gold reserves retreat as hastily as Union forces at Bull Run. In their place, he had Congress authorize the Treasury to issue paper money, so-called “greenbacks,” because, as Gordon writes, “they were printed in green ink on the reverse.” After that, legal tender was either greenbacks or the drafts of nationally chartered banks.
With the passage of the act creating the Federal Reserve Bank in 1913, Thomas Jefferson finally lost his argument with the moneychangers. Despite his faith in free enterprise, Gordon concludes that central banking alone is the greatest weapon to keep banks and currency sound, and the economy on an even keel. He believes Jefferson’s hostility to banks gave the nineteenth century endless cycles of boom and bust. At the same time, it was the US central bank, according to Gordon, that accelerated and locked in the 1930s Depression. He writes that “the Federal Reserve moved aggressively to defend the dollar and maintain the gold standard as foreign central banks and investors moved to repatriate gold. It was an utterly disastrous decision, perhaps the greatest of all the mistakes made in these years.”
By most accounts the Depression was the perfect storm of economic mismanagement. As the Fed raised interest rates to defend the US dollar, commercial banks, in turn, called in loans or foreclosed on mortgages. But deflation in the US market made it that much harder for farmers or other debtors to repay their loans. To make matters worse, President Hoover then asked Congress for a tax increase so that he could balance the budget. Congress dutifully went along with the request, and then raised the stakes in this game of incompetence by passing the Smoot-Hawley Act, which increased a variety of import tariffs. Higher interest rates, taxes, and tariffs choked economic development while the accompanying deflation left debtors unable to pay off their loans, thus collapsing more than 5000 banks. Gordon believes than opposition to centralized wealth froze the government’s ability to respond to the 1929 stock-market crash, and he cannot help but attribute some blame for the Depression to his favorite whipping boy, writing about Congress in 1931 that “the ghost of Thomas Jefferson was abroad in the its halls.”
In the glory days of American capital, when recession had threatened the American economy, wealthy industrialists, like J.P. Morgan, had stepped up to buy gold, securities, or collapsing railroads, and the panics had been averted or, at least, minimized. In the modern era the government has become the benevolent robber baron, and, in theory, Depressions are no longer possible because the Federal Reserve can pump enough liquidity into the system to keep banks solvent and consumers in credit. After the attacks of September 11th, which had followed the collapse of the technology stock bubble, a lingering US recession might have been among the damaged collateral, had the Fed not intervened. In the meantime, the US has run up unprecedented budget and trade deficits, at a time when the oil supply is tight and real estate is as expensive as Dutch tulips. But if I am reading Gordon correctly, he concurs with the Reagan administration in believing that “deficits don’t matter.”
* * *
Here’s one of the ironies of American economic history: that backing currency with gold, balancing the budget, running a trade surplus, avoiding wars, and letting the market sort out the good banks from the wildcats, is, in general, bad for the economy. The business of America flourishes in times of war (during WW I, GM’s stock climbed from 39 to 500), responds favorably to government subsidies (New York State financed the Erie Canal), lives well off the government’s easy money (during WW II, the national debt went from $43 billion to $296 billion), and doesn’t mind bank runs so long as the government is the lender of last resort (cf. the Reagan administration’s $200 billion bailout of the savings and loan industry). Native inventiveness and hard work certainly count for something, but there’s nothing like other people’s money, especially that of the government, to jump-start economic activity.
Aligned against these deficit-spending interests have been the likes of Thomas Jefferson (who opposed central banking), John Adams (who said: “Every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults represents nothing and therefore is a cheat upon somebody”), Andrew Jackson (who devoted his presidency to paying off the national debt and getting rid of the Second Bank of the United States), and even the much maligned Herbert Hoover (who, in the teeth of the Depression, tried to balance the budget). Although these men had their differences politically, all of them associated moneyed interests with the European aristocracy that had been swept away in the American Revolution. Wealth was something found on farmland or in a producing factory, not deposited in banks or hedge funds, with those William Jennings Bryan, quoting Thomas Carlisle, called “the idle holders of idle capital.”
Woven into Gordon’s history is an excellent summary of American taxation. As he writes: “Governments have only three ways to raise money to pay their bills. They can tax, they can borrow, and they can print.” After Hamilton paid off the revolutionary war debt at par, the government relied mostly on import tariffs to fund its relatively moderate expenditures. Only during the Civil War did the government impose an income tax, which lapsed during the period of Reconstruction. It was not until the administration of Woodrow Wilson, and with the costs of World War I, that America got a federal income tax of more than 50 percent (in the Civil War it was 3 percent). FDR imposed a tax on inheritance and later introduced the idea of withholding a portion of everyone’s income. When tariffs were the source of government revenue, Gordon notes that the national debate was between “sections of the country.” New England mill owners wanted high tariffs on cloth. The South wanted low tariffs. “With income tax, the debate was now one between economic classes.”
Although Gordon has many kind words for the likes J.P. Morgan, Herbert Hoover, and John Jacob Astor (whose “only regret” on his death bed was not having bought all of Manhattan), I sense between the lines of “Empire of Wealth” a grudging appreciation for Keynesian economics. Jefferson and his oft-quoted ghosts preferred the economy divided among forty acre plots and mules. In opposition, Hamilton and the Federalists believed in central banking, an industrial class, and the occasional government bailout, beginning with those revolutionary-era bonds.
Applied to the modern era, the government of George W. Bush would seem to be living the Federalist dream. The trade deficit is close to $1 trillion. 25 % of all mortgages are valued at more than 80 % of the appraised worth of the financed properties. In the last six years the accumulated budget deficits have approached $2 trillion. Jefferson and Jackson should be turning in their graves. But clearly the joke is on fiscal probity, at least when it comes to a nation. For all the Bush administration’s war mobilizations and spendthrift habits, from 2002-2005, real GDP grew more than 3 % in 10 successive quarters. Alas, in this instance, the robber barons bailing out American markets were not the heirs of J.P. Morgan, but leveraged customers, delirious in the aisles of Home Depot, who have maxed out their home equity lines.
Gordon ends his book on September 11, 2001, with a quote from Cicero (“the sinews of war are infinite money”) and a saber-rattling conclusion: “The American economy at the dawn of the twenty-first century was more nearly capable of producing those sinews than any other economy the world has ever known.” In that sense, the United States should prevail in the war on terrorism as it did in the Cold War—by spending the enemy into submission. But when you look at the Battle of September 11th, the costs to the attackers were some Wal-Mart box cutters, 19 plane tickets and flight-school tuition in Florida. In response, the American government has spent more than $1 trillion on homeland security and foreign wars, not to mention posting runaway trade and budget deficits. For those amounts, the US is mired in Iraq, and the enemy can enlist suicide bombers from recruitment posters that run daily on global television. Which side is burying the other with the sinews of expenditure?
Thursday, March 30, 2006
Monday, March 13, 2006
Branch Davidian Waco
Not long ago at Baylor University, I found it impossible to be in Waco, Texas and not to try to find the world of David Koresh that Attorney General Janet Reno had reduced to ashes. In another version of this history, it was Koresh himself who put his own parish to the torch. But the few people that I asked about the Branch Davidian house didn’t know exactly where it was located. It was only later that I met a professor of journalism, Sara Whelan, who was willing to track down its location. She had recently escaped from New Orleans to Waco, and thus she still had a newcomer’s curiosity. We stopped at an Interstate tourist office, and a few minutes later Professor Whelan proudly emerged from the building with pre-printed directions to “Mount Carmel,” the formal name of the building complex that, in April 1993, burned to the ground after officers from the Federal Bureau of Investigation (FBI) and the Bureau of Alcohol, Firearms, and Tobacco (ATF) moved in with tanks and nerve gas.
In trying to find the Double EE Rand Road on lonesome prairie, we made a few wrong turns and actually pulled into the driveway of the Double EE Ranch, which is as impressive as that of J.R. Ewing’s Southfork. A ranch hand corrected our mistake—we had turned left one road too early—and in a few moments we parked Whelan’s car on the edge of Mt. Carmel, in front of a makeshift museum that had a hand-painted sign offering tours of the grounds for $5. A few hundred yards into the property is a newly built white church. Between the road and its front door there are rows of freshly planted trees and small headstones, memorializing the names of the 81 Davidians who died in the1993 firefights. In effect, the Koresh church (although this is contested within the sect) still owns or controls the land, which is used partly for the congregation and partly as a parable on freedom of religion and government violence.
If, when I had stood in the drive of the Koresh estate, I had been asked to recount the events that had defined the first year of the Bill Clinton presidency, I would have said trigger-happy members of the FBI and ATF had attacked a rural commune—one that worshipped polygamy and guns as much as the second coming of Christ. I believed Attorney General Reno had used what is called “excessive force,” but I knew nothing about the cult’s leader, David Koresh, other than sensing that he and his followers had gotten their wish of having their judgment day coincide with a fiery conflagration. But mostly I would have been guessing, not having seen any of the siege on television, and never having read any histories of either Koresh or his followers. Nevertheless, standing in the Texas sunshine, I believed Mt. Carmel to be a variation on the themes of Jonestown, only this time the ATF had spiked the Kool Aid.
It was only several weeks later, after leaving Waco, that I managed to read several histories of the 1993 barn burning. In Waco itself, the local Barnes & Noble had no books on either Koresh or his demise. (The city would prefer more positive associations.) But from the Internet I purchased The Ashes of Waco: An Investigation by Dick J. Reavis, which from reading the promotional quotes I hoped might be free from the many conspiracy theories that this Armageddon has inspired. From Reavis, I was finally able to connect the grounds on which we parked Whelan’s car to the events of winter and spring, 1993. Alas, the museum promising $5 tours was closed, and the Mt. Carmel church doors were locked. Nor were any pilgrims on the road. Thus we had walked the grounds in eerie silence, as if on a movie set that had lost its audio feed or on a civil war battlefield where it was difficult to recall the exact circumstances in which Union soldiers had ambushed men, women and children it had deemed Rebels.
To give a bare minimum of the church’s background, it is necessary to start by saying that David Koresh was his adopted Biblical name, and that the leader of the Branch Davidians (not a name the group used to describe itself) was born Vernon Howell. He grew up in a broken Texan home, his mother having been 14 when he was born and his father absent from his life. Long before Howell drifted to Waco in 1980, the rural complex of wooden building had been associated with a schismatic group of Seventh-Day Adventists. Reavis calls them “perhaps renegade, but heirs nonetheless” of the “eight-million member Seventh-Day Adventist (SDA) Church,” which, among others, can count among its early believers John Harvey Kellogg, the father of corn flakes. In 1942, a splinter group had renamed itself the “Davidian Seventh Day Adventist Association,” and it was from a lease in that name on Mt. Carmel lands that the press got the notion that Koresh’s followers should be known as “Branch Davidians.”
In fact, textual inspiration for the Koresh faithful came from the Seven Seals in the Book of Revelation, and those living at Mt. Carmel—a potluck of communal Europeans, Australians, and Americans—would have thought themselves nothing more exotic than students of the Bible, with emphasis on the Seven Seals. Although some of the men trained with firearms, it was not a gun cult, as you would find in rural Montana. Indeed, Reavis writes: “The people who had lived at Mt. Carmel were more akin to the Shakers and to the Onieda community—parts of today’s Americana—than to the members of the Charles Manson cult.” But if all they were doing out there on the Double EE Ranch Road was reading the Bible or baking communal bread, how did it come to pass that they found themselves under siege and then under attack from the combined arms of the FBI, the ATF, and the National Guard?
In reality, the G-men were attacking David Koresh more than they were laying waste to a rural congregation, near nothing and no one, 12 miles outside the city of Waco. Deserved or not, he had gained a reputation among local law-enforcement officials as a new-age preacher who was dredging up quotations from the New Testament to justify polygamy, dope dealing, and the stock-piling of assault rifles. In 1992 a UPS man had sounded the alarm after he spotted some hand grenades at the church.
Koresh had become a marked man. While thundering in his pulpit, he had found time to father 17 children, some with girls under the legal age of consent and others by women married to fellow Davidians. He had also amassed a formidable gun collection, notably from a co-religionist who made the rounds of the Texas gun shows. Although a man of the cloth—he told his flock that he was a third Christ, “a mortal embodying the spirit of God,”—Koresh enjoyed jamming with a communal rock band long into Texas summer nights. Had the Davidians not been armed, the encampment might well have seemed an out-take from Life of Brian. (Brian’s mother: “He’s not the Messiah. He’s a very naughty boy.”) In the makeshift cemetery in front of the rebuilt Mt. Carmel church is the wreckage of a Harley Davidson, a Koresh favorite when he wasn’t preaching about the “investigative Judgment of the dead.” One of his followers recalled: “David didn’t read anything but the Bible and Camaro magazines.”
In retrospect, had local police officials wanted either to question or arrest Koresh (although being a Messiah is not a crime in Texas or anywhere else), all they needed to do was pick him up on one of his frequent trips into Waco. The residents of Mt. Carmel may have had their own views on the Book of Revelation, not to mention their special take on marriage laws, but they did come and go from their compound. Instead the ATF cooked up one of those police raids that you see on television when it is airing “Real Tales from the Highway Patrol” or covering some narcotics bust.
At around 10 AM on February 28th, various law-enforcement officers, backed up by armed helicopters, tried to take Mt. Carmel by storm. Standing at the front door, Koresh was badly wounded in the initial assault. But in an amazing feat of arms (no matter which side of this story you believe), the Davidian militia fought off the ATF raiders, including the armed helicopters that had strafed the church buildings. 20 attackers were wounded, and four were killed. The Davidians suffered 6 killed. In a truce negotiated over the phone, the government withdrew from the property and laid down its siege lines, which isolated the compound for almost two months. Hence began the Texas standoff that attracted more than 1000 members of the world media, not to mention the FBI and U.S. army brass, including those in General Wesley Clark’s chain of command, who later would have supplied the assault armor.
On April 19th, under rules of engagement signed by Attorney General Reno, the government attacked again, this time using tanks to pierce the Mt. Carmel Center’s walls and to shoot canisters of CS nerve gas into the wooden compound. (As the tanks rolled forward, an FBI public address system blared: “This is not an assault. This is not an assault.”) Not reassured, the Davidians fought the mechanized agents, although this time the buildings caught fire and consumed all but nine of the 84 residents, including twenty-one children under age 16. From these ashes have come the conspiracy theories, many of which dwell on who started the fatal fire.
In the accounts of the US and state governments, Koresh devoured his own, as if fulfilling a prophesy in the Book of Revelation, rather than submit to the laws of civil society. Other histories, however, explain how CS nerve gas can become combustible, especially when shot by a tank into a wooden building. None of the nine Davidian survivors saw the fire start. But there is agreement that Koresh had the corridors at Mt. Carmel lined with hay, either as part of its primitive defense network or to feed the flames of judgment day. (During the standoff, Koresh told an FBI negotiator over the phone: "you're behind the Bradley [armored personnel carrier] we're here behind the walls of sheetrock.")
In weighing the evidence against Koresh, Reavis, who has been Nieman Fellow at Harvard University and who was an editor at Texas Monthly, disputes much official testimony. He quotes numerous witnesses to say that Koresh did not deal in drugs, and he cites the FBI, itself, to confirm that child abuse was not a variant at Mt. Carmel. Uncomfortably, he also reminds readers that “…there is no federal or Texas statute against stockpiling arms; anyone who can legally buy one weapon can legally buy a hundred, or even a thousand of them.” He describes Koresh the progenitor and Koresh the gunsmith as inhabiting legal worlds of his own construction, backed up by odd quotes from the Bible. (He once described Mt. Carmel’s extraterritorial status with a reference to Vatican City.) But the Waco story lays bare all sorts of troubling constitutional issues about freedom of religion, the right to bear arms, what constitutes a church, private property, and the uses of federal troops to enforce state laws. Is it Biblical or state law that should govern what goes on in the backseat of a Camaro?
As the church doors were locked and the museum was closed, there wasn’t much to see on the grounds of Mt. Carmel. Near the church are the burned remains of a bus and numerous headstones, as you would find on a battlefield. We lingered over the marker that reads: “In remembrance of all the men, women and children who were victimized and brutally slaughtered in the bombing of the Oklahoma City Federal Building on April 19, 1995. We pray that they and their families find comfort and peace in Our Lord.”
Two years to the day after Mt. Carmel burned, Timothy McVeigh detonated his U-Haul explosives in anger over what he perceived as government-sponsored murder of the Davidians. During the initial siege at Waco, McVeigh had even tried to get close to Mt. Carmel and, while near the barricades, had passed out leaflets that read: “A Man With A Gun Is A Citizen, A Man Without A Gun Is A Subject.” But I still find it difficult to decode the symbolism of this monument, placed where it is. Is it just condemning all random violence or acts of terror? Does it imply indirect sympathy with McVeigh who believed that ATF officers were at work in the Alfred P. Murah Building in Oklahoma City? In a larger sense, all the monuments in front of the church, including those placed by the ATF, raise the difficult question about who are the victims at Waco: the dead government officers, the Davidian women and children, or the US Constitution?
Leaving Mt. Carmel, Professor Whelan and I stopped at the only other house on the road and chatted at length with a man who for years had been David Koresh’s next door neighbor. I never did learn his name, but during the siege the FBI had taken over his house—and only months later had paid him compensation. He now regretted that he had come to live across the street from a cult, and he told the story of how late one night, a family had escaped from Koresh’s heavy-handed control and asked the neighbor to drive them into town, which he did. The next morning, when an angry Koresh confronted him about hustling away these wayward sheep, the neighbor played it coolly dumb, saying: “But, David, I thought you had wanted me to take them into town.” His feeling was that Koresh, himself, had ignited the last fire, but he hardly believed the Davidians a threat to anyone but themselves. He and his wife had kept a polite distance from the commune, which often acted as though the Messiah had returned as Led Zeppelin. But the rock music annoyed the neighbors more than the guns or the Bible classes. (What house in Texas isn’t stockpiled with rifles and Bibles?) And the neighbor could well be the source of a quote in Reavis: “I’ll tell you what does bother me. This is a big fuss over nothing. These people have been here a long time and never bothered nobody.”
In trying to find the Double EE Rand Road on lonesome prairie, we made a few wrong turns and actually pulled into the driveway of the Double EE Ranch, which is as impressive as that of J.R. Ewing’s Southfork. A ranch hand corrected our mistake—we had turned left one road too early—and in a few moments we parked Whelan’s car on the edge of Mt. Carmel, in front of a makeshift museum that had a hand-painted sign offering tours of the grounds for $5. A few hundred yards into the property is a newly built white church. Between the road and its front door there are rows of freshly planted trees and small headstones, memorializing the names of the 81 Davidians who died in the1993 firefights. In effect, the Koresh church (although this is contested within the sect) still owns or controls the land, which is used partly for the congregation and partly as a parable on freedom of religion and government violence.
If, when I had stood in the drive of the Koresh estate, I had been asked to recount the events that had defined the first year of the Bill Clinton presidency, I would have said trigger-happy members of the FBI and ATF had attacked a rural commune—one that worshipped polygamy and guns as much as the second coming of Christ. I believed Attorney General Reno had used what is called “excessive force,” but I knew nothing about the cult’s leader, David Koresh, other than sensing that he and his followers had gotten their wish of having their judgment day coincide with a fiery conflagration. But mostly I would have been guessing, not having seen any of the siege on television, and never having read any histories of either Koresh or his followers. Nevertheless, standing in the Texas sunshine, I believed Mt. Carmel to be a variation on the themes of Jonestown, only this time the ATF had spiked the Kool Aid.
It was only several weeks later, after leaving Waco, that I managed to read several histories of the 1993 barn burning. In Waco itself, the local Barnes & Noble had no books on either Koresh or his demise. (The city would prefer more positive associations.) But from the Internet I purchased The Ashes of Waco: An Investigation by Dick J. Reavis, which from reading the promotional quotes I hoped might be free from the many conspiracy theories that this Armageddon has inspired. From Reavis, I was finally able to connect the grounds on which we parked Whelan’s car to the events of winter and spring, 1993. Alas, the museum promising $5 tours was closed, and the Mt. Carmel church doors were locked. Nor were any pilgrims on the road. Thus we had walked the grounds in eerie silence, as if on a movie set that had lost its audio feed or on a civil war battlefield where it was difficult to recall the exact circumstances in which Union soldiers had ambushed men, women and children it had deemed Rebels.
To give a bare minimum of the church’s background, it is necessary to start by saying that David Koresh was his adopted Biblical name, and that the leader of the Branch Davidians (not a name the group used to describe itself) was born Vernon Howell. He grew up in a broken Texan home, his mother having been 14 when he was born and his father absent from his life. Long before Howell drifted to Waco in 1980, the rural complex of wooden building had been associated with a schismatic group of Seventh-Day Adventists. Reavis calls them “perhaps renegade, but heirs nonetheless” of the “eight-million member Seventh-Day Adventist (SDA) Church,” which, among others, can count among its early believers John Harvey Kellogg, the father of corn flakes. In 1942, a splinter group had renamed itself the “Davidian Seventh Day Adventist Association,” and it was from a lease in that name on Mt. Carmel lands that the press got the notion that Koresh’s followers should be known as “Branch Davidians.”
In fact, textual inspiration for the Koresh faithful came from the Seven Seals in the Book of Revelation, and those living at Mt. Carmel—a potluck of communal Europeans, Australians, and Americans—would have thought themselves nothing more exotic than students of the Bible, with emphasis on the Seven Seals. Although some of the men trained with firearms, it was not a gun cult, as you would find in rural Montana. Indeed, Reavis writes: “The people who had lived at Mt. Carmel were more akin to the Shakers and to the Onieda community—parts of today’s Americana—than to the members of the Charles Manson cult.” But if all they were doing out there on the Double EE Ranch Road was reading the Bible or baking communal bread, how did it come to pass that they found themselves under siege and then under attack from the combined arms of the FBI, the ATF, and the National Guard?
In reality, the G-men were attacking David Koresh more than they were laying waste to a rural congregation, near nothing and no one, 12 miles outside the city of Waco. Deserved or not, he had gained a reputation among local law-enforcement officials as a new-age preacher who was dredging up quotations from the New Testament to justify polygamy, dope dealing, and the stock-piling of assault rifles. In 1992 a UPS man had sounded the alarm after he spotted some hand grenades at the church.
Koresh had become a marked man. While thundering in his pulpit, he had found time to father 17 children, some with girls under the legal age of consent and others by women married to fellow Davidians. He had also amassed a formidable gun collection, notably from a co-religionist who made the rounds of the Texas gun shows. Although a man of the cloth—he told his flock that he was a third Christ, “a mortal embodying the spirit of God,”—Koresh enjoyed jamming with a communal rock band long into Texas summer nights. Had the Davidians not been armed, the encampment might well have seemed an out-take from Life of Brian. (Brian’s mother: “He’s not the Messiah. He’s a very naughty boy.”) In the makeshift cemetery in front of the rebuilt Mt. Carmel church is the wreckage of a Harley Davidson, a Koresh favorite when he wasn’t preaching about the “investigative Judgment of the dead.” One of his followers recalled: “David didn’t read anything but the Bible and Camaro magazines.”
In retrospect, had local police officials wanted either to question or arrest Koresh (although being a Messiah is not a crime in Texas or anywhere else), all they needed to do was pick him up on one of his frequent trips into Waco. The residents of Mt. Carmel may have had their own views on the Book of Revelation, not to mention their special take on marriage laws, but they did come and go from their compound. Instead the ATF cooked up one of those police raids that you see on television when it is airing “Real Tales from the Highway Patrol” or covering some narcotics bust.
At around 10 AM on February 28th, various law-enforcement officers, backed up by armed helicopters, tried to take Mt. Carmel by storm. Standing at the front door, Koresh was badly wounded in the initial assault. But in an amazing feat of arms (no matter which side of this story you believe), the Davidian militia fought off the ATF raiders, including the armed helicopters that had strafed the church buildings. 20 attackers were wounded, and four were killed. The Davidians suffered 6 killed. In a truce negotiated over the phone, the government withdrew from the property and laid down its siege lines, which isolated the compound for almost two months. Hence began the Texas standoff that attracted more than 1000 members of the world media, not to mention the FBI and U.S. army brass, including those in General Wesley Clark’s chain of command, who later would have supplied the assault armor.
On April 19th, under rules of engagement signed by Attorney General Reno, the government attacked again, this time using tanks to pierce the Mt. Carmel Center’s walls and to shoot canisters of CS nerve gas into the wooden compound. (As the tanks rolled forward, an FBI public address system blared: “This is not an assault. This is not an assault.”) Not reassured, the Davidians fought the mechanized agents, although this time the buildings caught fire and consumed all but nine of the 84 residents, including twenty-one children under age 16. From these ashes have come the conspiracy theories, many of which dwell on who started the fatal fire.
In the accounts of the US and state governments, Koresh devoured his own, as if fulfilling a prophesy in the Book of Revelation, rather than submit to the laws of civil society. Other histories, however, explain how CS nerve gas can become combustible, especially when shot by a tank into a wooden building. None of the nine Davidian survivors saw the fire start. But there is agreement that Koresh had the corridors at Mt. Carmel lined with hay, either as part of its primitive defense network or to feed the flames of judgment day. (During the standoff, Koresh told an FBI negotiator over the phone: "you're behind the Bradley [armored personnel carrier] we're here behind the walls of sheetrock.")
In weighing the evidence against Koresh, Reavis, who has been Nieman Fellow at Harvard University and who was an editor at Texas Monthly, disputes much official testimony. He quotes numerous witnesses to say that Koresh did not deal in drugs, and he cites the FBI, itself, to confirm that child abuse was not a variant at Mt. Carmel. Uncomfortably, he also reminds readers that “…there is no federal or Texas statute against stockpiling arms; anyone who can legally buy one weapon can legally buy a hundred, or even a thousand of them.” He describes Koresh the progenitor and Koresh the gunsmith as inhabiting legal worlds of his own construction, backed up by odd quotes from the Bible. (He once described Mt. Carmel’s extraterritorial status with a reference to Vatican City.) But the Waco story lays bare all sorts of troubling constitutional issues about freedom of religion, the right to bear arms, what constitutes a church, private property, and the uses of federal troops to enforce state laws. Is it Biblical or state law that should govern what goes on in the backseat of a Camaro?
As the church doors were locked and the museum was closed, there wasn’t much to see on the grounds of Mt. Carmel. Near the church are the burned remains of a bus and numerous headstones, as you would find on a battlefield. We lingered over the marker that reads: “In remembrance of all the men, women and children who were victimized and brutally slaughtered in the bombing of the Oklahoma City Federal Building on April 19, 1995. We pray that they and their families find comfort and peace in Our Lord.”
Two years to the day after Mt. Carmel burned, Timothy McVeigh detonated his U-Haul explosives in anger over what he perceived as government-sponsored murder of the Davidians. During the initial siege at Waco, McVeigh had even tried to get close to Mt. Carmel and, while near the barricades, had passed out leaflets that read: “A Man With A Gun Is A Citizen, A Man Without A Gun Is A Subject.” But I still find it difficult to decode the symbolism of this monument, placed where it is. Is it just condemning all random violence or acts of terror? Does it imply indirect sympathy with McVeigh who believed that ATF officers were at work in the Alfred P. Murah Building in Oklahoma City? In a larger sense, all the monuments in front of the church, including those placed by the ATF, raise the difficult question about who are the victims at Waco: the dead government officers, the Davidian women and children, or the US Constitution?
Leaving Mt. Carmel, Professor Whelan and I stopped at the only other house on the road and chatted at length with a man who for years had been David Koresh’s next door neighbor. I never did learn his name, but during the siege the FBI had taken over his house—and only months later had paid him compensation. He now regretted that he had come to live across the street from a cult, and he told the story of how late one night, a family had escaped from Koresh’s heavy-handed control and asked the neighbor to drive them into town, which he did. The next morning, when an angry Koresh confronted him about hustling away these wayward sheep, the neighbor played it coolly dumb, saying: “But, David, I thought you had wanted me to take them into town.” His feeling was that Koresh, himself, had ignited the last fire, but he hardly believed the Davidians a threat to anyone but themselves. He and his wife had kept a polite distance from the commune, which often acted as though the Messiah had returned as Led Zeppelin. But the rock music annoyed the neighbors more than the guns or the Bible classes. (What house in Texas isn’t stockpiled with rifles and Bibles?) And the neighbor could well be the source of a quote in Reavis: “I’ll tell you what does bother me. This is a big fuss over nothing. These people have been here a long time and never bothered nobody.”
Sunday, March 05, 2006
Third-Party Time
I must say that I cannot get excited over the furor about whether a holding company from the United Arab Emirates will compromise the national security of the United States if it owns the shares of P & O—the Peninsula & Oriental Steam Navigation Company of yore—which, in turn, has interests in various East Coast ports. As I get the drift of this outrage du jour, the U.A.E. is feared to be in the murky shadows of Arab fundamentalism, if not an al-Qaida oasis. Thus the risk on the waterfront is that containers swinging ashore in Staten Island or Baltimore could be the primitive delivery system of a so-called dirty bomb, the kind of nuclear Molotov cocktail that everyone fears Osama bin Laden is brewing under his desk in the Tora Bora.
The reason I can’t get excited is that if you decide that Arab capital is seditious or un-American, what kind of loyalty oath is required of the Fortune 500, which is replete with shareholders from shores more hostile than those of the U.A.E’s Barbary capitalists? For example, a Saudi Arabian prince, for a while, controlled about 10 percent of Citibank. (Dubai had 2 of the 19 hijackers; Saudi had 16.) Interests in American ports, already, are spread among a number of international companies. On other fronts German conglomerates own most of the large American book publishers, not to mention defense contractor Chrysler. Or take, for example, the national debt, which is largely pawned to countries like Japan, South Korea, China, and Taiwan. Why get worked up about container facilities in Philadelphia (essentially parking lots for large boxes) but turn a blind eye to the fact that the American dream is carrying a large mortgage with Far East lenders that have had—how shall I put it—mixed historical relations with the United States.
At the same time I take the theatrics over terminal investments to be the first skirmishes in the 2008 presidential election, which thus far has lacked both candidates and emotion. Among those in the bully pulpit, railing against terror’s strategic plans, is Senator Hilary Clinton, who clearly is looking to hoist the Bush administration on its own petard of homeland security. With U.A.E. shareholders, the senator has a good, safe menace—a convenient scapegoat without a lot of votes in the precincts of Nassau County. It’s a free shot at international capitalism, which can be cast as a bloated monster, one of Thomas Nast’s trust caricatures, not to mention a feel-good story for the Longshoremen’s Union, who cannot want their stevedores unloading the cargoes of terrorism. Even better, anger at Dubai Ports World outflanks Karl Rove’s permanent state of emergency, in that it shows the Bush administration cutting the corners of favoritism by quickly and quietly approving the transaction, and thus putting the interests of fat cats above those of guard dogs.
The question of who owns the shares of P & O is an electoral sideshow, something that cannot easily translate into congressional hearings or the storyboards of political action committees. If the Democrats and Republicans have to campaign on who will do a better job witch hunting the share registries of American stock markets, my sense is that both of the major parties have run out of serious ideas. Indeed, I often think it remarkable that America has been able to hang on to its two-party system for as long as it has, given that the parties strike me as being distinctions without any differences.
Analyze this: while Senator Hilary Clinton tries to position herself as the Democratic nominee for the 2008 election, her former-president husband, in theory the leader of the Democratic opposition, has decided that he and his party’s image are best served if he plays the role of the Bush family’s best friend. On any given day, he and the presidents Bush can be seen giving comfort to hurricane or tsunami survivors, if they are not squeezing in a round of golf. What this tells me is that parties count for little in the game to govern America, which since the 1960s has been run by a series of interchangeable political oligarchies—ones that have names like Kennedy, Bush, Clinton, and Dole. Indeed since 1976, a Bush, Dole, or Clinton has been a candidate in every election. If we are to believe those handicapping the 2008 election, the chances are good that a Clinton or a Bush will again be on one of the tickets, assuming that they don’t dispense with democratic niceties and run the country with a triumvirate of Hilary Clinton, Jeb Bush, and Elizabeth Dole.
What do the major parties stand for? I wish I knew. In theory, and according to the received wisdom, Republicans favor big business, budget restraint, low taxes, free trade, and isolationist tendencies in foreign policy. Imagine someone like Robert Taft or Henry Cabot Lodge. In contrast, the Democrats are there for labor unions, federal programs, farm subsidies, environmental protection, social security, and the odd war to end all wars. Hubert Humphrey comes to mind. Then what explains the seemingly Republican administration of President Bill Clinton, who balanced the budget, busted unions, posted surpluses, threw bones around Wall Street, and restricted jingoism to bombs over Belgrade? By extension, the current Bush administration would appear to have cornered the same markets in deficit spending that so enticed Democratic President Lyndon Johnson to go abroad in search of monsters and, at home, to federalize everything from school lunches to oil depletion allowances.
In the higher echelons of government, I fear, America is a one-party state, at service only to maintain the privileges of power. Party politics remind me of post-republican Rome, after the death of Caesar, when Cato was called “a doomed man in a doomed state” and when Augustus managed “to break the old combinations of nobles and clients and organize all the citizens of Rome in a single ‘party’, or, more correctly, into a group of clients, united in loyalty to the ruler.” What else explains the current absence of a Democratic opposition, save for some anger against port shareholders or the odd denunciation of torture, at a time when the country is losing a colonial war abroad, and the national debt is $8.2 trillion, of which your family’s share is $131,000?
* * *
In the American past, whenever political parties have failed to offer the electorate choices on issues or government, third-party candidates have emerged. It happened in 1912, 1948, 1968, and 1992, although during many other elections through the 20th century third-party candidates both appeared on the ballots and in some cases may have altered the outcome of the election. Who does not, for example, believe that in 2000 Al Gore lost Florida, and thus the presidency, because of the presence on that confusing ballot of the consumerist, Ralph Nader?
As a joker in the American political deck, third parties lend drama and excitement to what can otherwise be as humdrum as choosing between a Buick and a Pontiac. They even have better names than Democrats and Republicans. Who wouldn’t want to be a member of a party called Whig, Mugwump, Anti-Masonic, Know-Nothing, Abolitionist, Free Soil, Greenback or Populist? But they never seem to get anywhere against the entrenched interests. Nevertheless, in recent weeks, I have spent considerable time reading and thinking about third parties—speculating that 2008 might be yet be another wild card election, decided by a candidate for a party that has yet to exist, but which could go by the name Abortionist, Second Amendment, Divine Inspiration, Flat Tax, Out of Iraq, Constitutional, or, to name my own cause, Anti-Astroturf.
Leaving aside 1860 and the accidental election of Abraham Lincoln, the mother of all third-party elections was 1912, a story recently retold in James Chace’s “1912: Wilson, Roosevelt, Taft and Debs—The Election That Changed The Country.” Chace, who died last year, served as editor of “Foreign Affairs.” In 2004 he published his account of how Theodore Roosevelt, running on the Progressive line (nicknamed the Bull Moose Party), received 27 percent of the vote, thus effectively handing the presidency to Woodrow Wilson. In that election, President Taft, standing for re-election as the Republican, was consigned to 23 percent of the popular vote and 8 electoral votes—Vermont and Utah—as if maybe his only supporters were Mormons. The irony is that Roosevelt had picked Taft to succeed him in 1908, but Chace writes: “Theirs was a breach that would never be fully healed.” At his third-party nominating convention, Roosevelt proclaimed: “We are warring against bossism, against privilege social and industrial,” positions he defended on another occasion by saying: “If that is revolution, make the most of it.”
I disagree with Chace that the 1912 election “changed the country.” But it was colorful. Roosevelt, in addition to breaking with his protégé Taft, called Wilson “the apothecary’s clerk.” Debs, a socialist, ran for President while awaiting a Supreme Court decision on whether, in fact, he had violated the Espionage and Sedition Acts. Wilson dreamed of running as a populist and as a reformer, but, as another biographer wrote, the preacher “had a profound contempt for the Farmer’s Alliance, the Populists, greenbackers, bi-metallists, trades unionists, small office seekers, Italians, Poles, Hungarians, pensioners, strikers, armies of unemployed.” In fact, he owed his nomination to machine politicians. Chace breaks down the positions of the various candidates as follows: Roosevelt (“pragmatic nationalism”), Wilson (“self-righteous moralism”), Taft (“judicious conservatism”), and Debs (“socialist absolutism”). But he might well have quoted the McKinley power broker, Mark Hanna, who said, “all questions of government in a democracy are questions of money.” In 1912 the Democrats had the most money.
What’s interesting about the 1912 election is how skewed were the positions of the candidates, in relation to their party’s campaign buttons. Nominally one of the fathers of American conservatism, Teddy Roosevelt, according to Chace, “endorsed the graduated income and inheritance tax, a comprehensive workmen’s compensation act, prohibition of child labor, downward revision of the tariffs, and increased power for the Interstate Commerce Commission to supervise all corporations engaged in interstate business.” Labor agitator Debs spent as much time in prison as he did running for the presidency (he did both about five times). He was associated with radical socialism, although the man he most admired was Abraham Lincoln, for his “education, frugality, integrity, veracity, fidelity, diligence, sobriety, and charity.” Taft, a strict constitutional constructionist, was depicted as holding the moneybags of the party bosses, who instead were selling Saint Woodrow as if he were a patent medicine. Wilson won forty states and 435 electoral votes, and then spent the next four years assiduously incorporating the Bull Moose platform into Democratic sponsored legislation.
The eloquent American historian and Columbia University professor, Richard Hofstadter, observed that “third parties are like bees; once they have stung, they die.” Progressivism as a presidential party lasted a few more decades. But it never approached Teddy Roosevelt’s high water mark of 27 % of the popular vote, because by 1916 the Democrats had appropriated the third-party’s ideas. Wilson pushed through a federal income tax and various regulatory bodies. TR did try again in 1916 “to protect those who, under Mr. Wilson’s laissez-faire system, are trodden down in the ferocious scrambling rush of an unregulated and purely individualistic industrialism,” but during the 1916 campaign he was shot and by then, in any case, the Reverend Wilson was preaching from Teddy’s prayer book. He may even have fought the war to end all wars to get Roosevelt off his back.
* * *
In 1924, Wisconsin Senator Robert La Follette got 17 % of the vote as a third-party candidate, although the Jazz Age preferred Calvin Coolidge (54 %) to either the Progressive senator or the Democratic corporate lawyer, John W. Davis, who himself only secured the Democratic nomination on the 103rd ballot. Coolidge beat both of them although he never left his house to campaign. (How could they tell?) But the evolution of the Progressive party confirms the thesis of political scientist, Ronald Rapoport, that the success of third parties depends on voters either “pushing” away from major parties or the “pull” or attractiveness of dissident candidate ideas. In that, they are almost the push-me, pull-you creations of that noted political thinker, Dr. Doolittle.
During the four presidential elections that gave victory to Franklin Roosevelt, third parties candidates were seen but not heard. Norman Thomas replaced Eugene V. Debs as the perpetual candidate on the Socialist line, and ran on every occasion between 1932 and 1944. But he never got more than one percent of the vote, in part because the major parties offered clear, divergent platforms. If you wanted to soak the rich, you voted for Roosevelt; if not, you went Republican. In 1948, leaving aside the grammatical tautology, there were two third-party candidates: Henry Wallace for the Progressives and Strom Thurmond under the States’ Rights banner (sometimes called Dixiecrats). But collectively those on the fringe only stirred regional, not national enthusiasm, winning less than 5 % of the vote, although the Thurmond breakaway candidacy was the beginning of the end for the Democrats in the Deep South.
One of Thurmond’s spiritual heirs was Governor George C. Wallace of Alabama, who in 1968 ran on the American Independent Party, along with General Curtis Lemay, who thought the war in Indochina could be won if North Vietnam was “bombed back into the Stone ages.” (It was already there.) Pushing the segregationist line, Wallace got almost 14 % of the vote and 46 electoral votes, although it is not clear whether Wallace, nominally a Democrat, denied Humphrey a majority or Nixon a landslide. But as Rapoport has written: “All successful third-party candidates follow Wallace’s strategy of emphasizing the absence of a 'real choice' between the two major parties.” In 1972, after Wallace was wounded in an assassination attempt, his party ran a space orbiter by the name of John G. Schmitz (of National Rifle Association, John Birch, and American Legion credentials), who said during the campaign that “if people think you get up early, you can sleep until 11 AM.” He also came up with the campaign slogan that “When you’re out of Schmitz, you’re out of gear,” a play on the beer jingle of Schlitz. But Schmitz, with 1 % of the vote, didn’t even carry Milwaukee or make it famous.
Technically, in 1980 Congressman John Anderson was not a third-party candidate, in that he ran as an independent, without party affiliation. He won 7 % of the vote, but caused bigger damage to President Jimmy Carter in that he exposed the missing mojo in the Democrat’s presidency. In 1984 and 1988, the choices between the major parties, and their candidates were distinct (“Senator, you’re no Jack Kennedy.”), and thus no third-party candidates emerged. But that changed in 1992, when out of the thrilling days of yesteryear came that masked rider from the plains, H. Ross Perot, a Lone Ranger who, according to Rapoport and his co-author Walter Stone, changed the complexion of American politics more than any third-party candidate since Teddy Roosevelt.
* * *
Rapoport and Stone, respectively chairmen of the departments of political science at the College of William and Mary and the University of California at Davis, have recently published “Three’s a Crowd,” an account of the 1992 election and the subsequent Perot phenomenon. One of the surprising conclusions from the book, published by the University of Michigan Press, is that while Perot may well have cost Republican George Herbert Walker Bush his chance for re-election in 1992, his followers influenced the subsequent Republican revolution—beginning with the 1994 Contract with America and culminating after 2000 with victories for the White House, Senate and House of Representatives.
Two descriptions from the 1912 election could be applied to H. Ross Perot. In describing the German Kaiser, Wilhelm II, Teddy Roosevelt once said: “I found him vain as a peacock.” And Hofstadter, in writing of the likes of Woodrow Wilson, spoke of “the ruthlessness of the pure in heart.” Despite his peacock looks and ruthless purity, in 1992 Perot got almost 20 million votes, 19 % of those cast, and denied Bill Clinton a popular majority. His nominating convention was, in effect, an appearance on the Larry King Show when he dared his supporters to get him on the ballots of all 50 states. Collectively 5.3 million citizens signed petitions for Perot, who then campaigned as a classic outsider—for deficit reduction, against immigration and the North American Free Trade Agreement (NAFTA), for term limits, and against government waste. But 1992 wasn’t a good year for the major parties. Despite earlier Gulf War popularity, President Bush the elder was laboring under a cratering economy while voters were having a hard time inhaling the nightlife of the Democratic candidate, Bill Clinton. As an aide said of his boss, Perot was someone there to “fix the damn problem.”
One reason that successful third parties “sting and die” is that one or both of the major parties make takeover bids of the insurgent ideas. Beginning in 1994, the Republicans courted Perot’s supporters and their issues, about which the Democrats were largely indifferent. But according to Rapoport and Stone, Perot’s faithful remain a loose but powerful cannon in American politics. When it rolled to the Republican decks, they won control of the Congress and finally the Presidency. Rapoport and Stone write that, after 1992, “the Republicans reached out to Perot and to the Perot constituency.” They conclude that: “By migrating to one of the major parties, Perot activists carried the potential to change that party’s stands on core Perot issues, such as reform, economic nationalism, and the federal budget.” Even though Perot himself polled only 8 % of the vote 1996 and by 2000 the Reform Party had become a joke—reduced to a scrum for federally-matched funding between the likes of Jesse “the Body” Ventura, Pat Buchanan, and Donald Trump—the bee’s pollen was already allowing the Republicans to flower.
Thinking he could tell me who might be elected the next president in 2008, I called Professor Rapoport at his William and Mary office, where he has worked since 1975. Other than having read his provocative book, I did not know him personally. But I do know and admire his parents, who have made The Bernard and Audre Rapoport Foundation a model of generosity for the causes of literacy and the disadvantaged—although their gift is not so much money but enthusiasm for individuals and ideals.
On the phone Ronald Rapoport compared the looming 2008 election with 1992, in that there is a burgeoning deficit, the aftermath of a Persian Gulf invasion, and little perceived difference between the major political parties. He still believes that the Perot constituency “remains distinctive,” an underground political current looking to vent its populist anger on one of the major parties. But the outcome of the 2006 mid-term election will give him a better idea if the conditions might be ripe, in 2008, for the emergence of a third-party candidacy. He emphasized that the “major parties have to create the opportunity for a third party.” He recalled a line from the book that “one of the ironies of the Perot movement was that it [nominally non-partisan] contributed to one of the greatest upsurges in partisan politics in American history.”
Rapoport speaks about political candidates, third parties, and presidential politics with insight and irony. He thinks the conditions could well be ripe for a third-party in 2008, with all its attendant threats to the established order. (Alexander Pope called political parties “the madness of many for the gain of a few.”) Rapoport speculated that if the 2008 election were between Hilary Clinton and John McCain, he could imagine the Perot bloc swinging toward the Arizona senator, who in 2000 gave his campaign bus the Perot sounding name, “Straight Talk Express.” Ironically, push me, pull-you Perotism might explain, after all, why Bill Clinton has become best friends with the Bushes. Is it to move Hilary’s image into the safe middle ground? Too bad for the Democrats that Perot doesn’t play golf.
The reason I can’t get excited is that if you decide that Arab capital is seditious or un-American, what kind of loyalty oath is required of the Fortune 500, which is replete with shareholders from shores more hostile than those of the U.A.E’s Barbary capitalists? For example, a Saudi Arabian prince, for a while, controlled about 10 percent of Citibank. (Dubai had 2 of the 19 hijackers; Saudi had 16.) Interests in American ports, already, are spread among a number of international companies. On other fronts German conglomerates own most of the large American book publishers, not to mention defense contractor Chrysler. Or take, for example, the national debt, which is largely pawned to countries like Japan, South Korea, China, and Taiwan. Why get worked up about container facilities in Philadelphia (essentially parking lots for large boxes) but turn a blind eye to the fact that the American dream is carrying a large mortgage with Far East lenders that have had—how shall I put it—mixed historical relations with the United States.
At the same time I take the theatrics over terminal investments to be the first skirmishes in the 2008 presidential election, which thus far has lacked both candidates and emotion. Among those in the bully pulpit, railing against terror’s strategic plans, is Senator Hilary Clinton, who clearly is looking to hoist the Bush administration on its own petard of homeland security. With U.A.E. shareholders, the senator has a good, safe menace—a convenient scapegoat without a lot of votes in the precincts of Nassau County. It’s a free shot at international capitalism, which can be cast as a bloated monster, one of Thomas Nast’s trust caricatures, not to mention a feel-good story for the Longshoremen’s Union, who cannot want their stevedores unloading the cargoes of terrorism. Even better, anger at Dubai Ports World outflanks Karl Rove’s permanent state of emergency, in that it shows the Bush administration cutting the corners of favoritism by quickly and quietly approving the transaction, and thus putting the interests of fat cats above those of guard dogs.
The question of who owns the shares of P & O is an electoral sideshow, something that cannot easily translate into congressional hearings or the storyboards of political action committees. If the Democrats and Republicans have to campaign on who will do a better job witch hunting the share registries of American stock markets, my sense is that both of the major parties have run out of serious ideas. Indeed, I often think it remarkable that America has been able to hang on to its two-party system for as long as it has, given that the parties strike me as being distinctions without any differences.
Analyze this: while Senator Hilary Clinton tries to position herself as the Democratic nominee for the 2008 election, her former-president husband, in theory the leader of the Democratic opposition, has decided that he and his party’s image are best served if he plays the role of the Bush family’s best friend. On any given day, he and the presidents Bush can be seen giving comfort to hurricane or tsunami survivors, if they are not squeezing in a round of golf. What this tells me is that parties count for little in the game to govern America, which since the 1960s has been run by a series of interchangeable political oligarchies—ones that have names like Kennedy, Bush, Clinton, and Dole. Indeed since 1976, a Bush, Dole, or Clinton has been a candidate in every election. If we are to believe those handicapping the 2008 election, the chances are good that a Clinton or a Bush will again be on one of the tickets, assuming that they don’t dispense with democratic niceties and run the country with a triumvirate of Hilary Clinton, Jeb Bush, and Elizabeth Dole.
What do the major parties stand for? I wish I knew. In theory, and according to the received wisdom, Republicans favor big business, budget restraint, low taxes, free trade, and isolationist tendencies in foreign policy. Imagine someone like Robert Taft or Henry Cabot Lodge. In contrast, the Democrats are there for labor unions, federal programs, farm subsidies, environmental protection, social security, and the odd war to end all wars. Hubert Humphrey comes to mind. Then what explains the seemingly Republican administration of President Bill Clinton, who balanced the budget, busted unions, posted surpluses, threw bones around Wall Street, and restricted jingoism to bombs over Belgrade? By extension, the current Bush administration would appear to have cornered the same markets in deficit spending that so enticed Democratic President Lyndon Johnson to go abroad in search of monsters and, at home, to federalize everything from school lunches to oil depletion allowances.
In the higher echelons of government, I fear, America is a one-party state, at service only to maintain the privileges of power. Party politics remind me of post-republican Rome, after the death of Caesar, when Cato was called “a doomed man in a doomed state” and when Augustus managed “to break the old combinations of nobles and clients and organize all the citizens of Rome in a single ‘party’, or, more correctly, into a group of clients, united in loyalty to the ruler.” What else explains the current absence of a Democratic opposition, save for some anger against port shareholders or the odd denunciation of torture, at a time when the country is losing a colonial war abroad, and the national debt is $8.2 trillion, of which your family’s share is $131,000?
* * *
In the American past, whenever political parties have failed to offer the electorate choices on issues or government, third-party candidates have emerged. It happened in 1912, 1948, 1968, and 1992, although during many other elections through the 20th century third-party candidates both appeared on the ballots and in some cases may have altered the outcome of the election. Who does not, for example, believe that in 2000 Al Gore lost Florida, and thus the presidency, because of the presence on that confusing ballot of the consumerist, Ralph Nader?
As a joker in the American political deck, third parties lend drama and excitement to what can otherwise be as humdrum as choosing between a Buick and a Pontiac. They even have better names than Democrats and Republicans. Who wouldn’t want to be a member of a party called Whig, Mugwump, Anti-Masonic, Know-Nothing, Abolitionist, Free Soil, Greenback or Populist? But they never seem to get anywhere against the entrenched interests. Nevertheless, in recent weeks, I have spent considerable time reading and thinking about third parties—speculating that 2008 might be yet be another wild card election, decided by a candidate for a party that has yet to exist, but which could go by the name Abortionist, Second Amendment, Divine Inspiration, Flat Tax, Out of Iraq, Constitutional, or, to name my own cause, Anti-Astroturf.
Leaving aside 1860 and the accidental election of Abraham Lincoln, the mother of all third-party elections was 1912, a story recently retold in James Chace’s “1912: Wilson, Roosevelt, Taft and Debs—The Election That Changed The Country.” Chace, who died last year, served as editor of “Foreign Affairs.” In 2004 he published his account of how Theodore Roosevelt, running on the Progressive line (nicknamed the Bull Moose Party), received 27 percent of the vote, thus effectively handing the presidency to Woodrow Wilson. In that election, President Taft, standing for re-election as the Republican, was consigned to 23 percent of the popular vote and 8 electoral votes—Vermont and Utah—as if maybe his only supporters were Mormons. The irony is that Roosevelt had picked Taft to succeed him in 1908, but Chace writes: “Theirs was a breach that would never be fully healed.” At his third-party nominating convention, Roosevelt proclaimed: “We are warring against bossism, against privilege social and industrial,” positions he defended on another occasion by saying: “If that is revolution, make the most of it.”
I disagree with Chace that the 1912 election “changed the country.” But it was colorful. Roosevelt, in addition to breaking with his protégé Taft, called Wilson “the apothecary’s clerk.” Debs, a socialist, ran for President while awaiting a Supreme Court decision on whether, in fact, he had violated the Espionage and Sedition Acts. Wilson dreamed of running as a populist and as a reformer, but, as another biographer wrote, the preacher “had a profound contempt for the Farmer’s Alliance, the Populists, greenbackers, bi-metallists, trades unionists, small office seekers, Italians, Poles, Hungarians, pensioners, strikers, armies of unemployed.” In fact, he owed his nomination to machine politicians. Chace breaks down the positions of the various candidates as follows: Roosevelt (“pragmatic nationalism”), Wilson (“self-righteous moralism”), Taft (“judicious conservatism”), and Debs (“socialist absolutism”). But he might well have quoted the McKinley power broker, Mark Hanna, who said, “all questions of government in a democracy are questions of money.” In 1912 the Democrats had the most money.
What’s interesting about the 1912 election is how skewed were the positions of the candidates, in relation to their party’s campaign buttons. Nominally one of the fathers of American conservatism, Teddy Roosevelt, according to Chace, “endorsed the graduated income and inheritance tax, a comprehensive workmen’s compensation act, prohibition of child labor, downward revision of the tariffs, and increased power for the Interstate Commerce Commission to supervise all corporations engaged in interstate business.” Labor agitator Debs spent as much time in prison as he did running for the presidency (he did both about five times). He was associated with radical socialism, although the man he most admired was Abraham Lincoln, for his “education, frugality, integrity, veracity, fidelity, diligence, sobriety, and charity.” Taft, a strict constitutional constructionist, was depicted as holding the moneybags of the party bosses, who instead were selling Saint Woodrow as if he were a patent medicine. Wilson won forty states and 435 electoral votes, and then spent the next four years assiduously incorporating the Bull Moose platform into Democratic sponsored legislation.
The eloquent American historian and Columbia University professor, Richard Hofstadter, observed that “third parties are like bees; once they have stung, they die.” Progressivism as a presidential party lasted a few more decades. But it never approached Teddy Roosevelt’s high water mark of 27 % of the popular vote, because by 1916 the Democrats had appropriated the third-party’s ideas. Wilson pushed through a federal income tax and various regulatory bodies. TR did try again in 1916 “to protect those who, under Mr. Wilson’s laissez-faire system, are trodden down in the ferocious scrambling rush of an unregulated and purely individualistic industrialism,” but during the 1916 campaign he was shot and by then, in any case, the Reverend Wilson was preaching from Teddy’s prayer book. He may even have fought the war to end all wars to get Roosevelt off his back.
* * *
In 1924, Wisconsin Senator Robert La Follette got 17 % of the vote as a third-party candidate, although the Jazz Age preferred Calvin Coolidge (54 %) to either the Progressive senator or the Democratic corporate lawyer, John W. Davis, who himself only secured the Democratic nomination on the 103rd ballot. Coolidge beat both of them although he never left his house to campaign. (How could they tell?) But the evolution of the Progressive party confirms the thesis of political scientist, Ronald Rapoport, that the success of third parties depends on voters either “pushing” away from major parties or the “pull” or attractiveness of dissident candidate ideas. In that, they are almost the push-me, pull-you creations of that noted political thinker, Dr. Doolittle.
During the four presidential elections that gave victory to Franklin Roosevelt, third parties candidates were seen but not heard. Norman Thomas replaced Eugene V. Debs as the perpetual candidate on the Socialist line, and ran on every occasion between 1932 and 1944. But he never got more than one percent of the vote, in part because the major parties offered clear, divergent platforms. If you wanted to soak the rich, you voted for Roosevelt; if not, you went Republican. In 1948, leaving aside the grammatical tautology, there were two third-party candidates: Henry Wallace for the Progressives and Strom Thurmond under the States’ Rights banner (sometimes called Dixiecrats). But collectively those on the fringe only stirred regional, not national enthusiasm, winning less than 5 % of the vote, although the Thurmond breakaway candidacy was the beginning of the end for the Democrats in the Deep South.
One of Thurmond’s spiritual heirs was Governor George C. Wallace of Alabama, who in 1968 ran on the American Independent Party, along with General Curtis Lemay, who thought the war in Indochina could be won if North Vietnam was “bombed back into the Stone ages.” (It was already there.) Pushing the segregationist line, Wallace got almost 14 % of the vote and 46 electoral votes, although it is not clear whether Wallace, nominally a Democrat, denied Humphrey a majority or Nixon a landslide. But as Rapoport has written: “All successful third-party candidates follow Wallace’s strategy of emphasizing the absence of a 'real choice' between the two major parties.” In 1972, after Wallace was wounded in an assassination attempt, his party ran a space orbiter by the name of John G. Schmitz (of National Rifle Association, John Birch, and American Legion credentials), who said during the campaign that “if people think you get up early, you can sleep until 11 AM.” He also came up with the campaign slogan that “When you’re out of Schmitz, you’re out of gear,” a play on the beer jingle of Schlitz. But Schmitz, with 1 % of the vote, didn’t even carry Milwaukee or make it famous.
Technically, in 1980 Congressman John Anderson was not a third-party candidate, in that he ran as an independent, without party affiliation. He won 7 % of the vote, but caused bigger damage to President Jimmy Carter in that he exposed the missing mojo in the Democrat’s presidency. In 1984 and 1988, the choices between the major parties, and their candidates were distinct (“Senator, you’re no Jack Kennedy.”), and thus no third-party candidates emerged. But that changed in 1992, when out of the thrilling days of yesteryear came that masked rider from the plains, H. Ross Perot, a Lone Ranger who, according to Rapoport and his co-author Walter Stone, changed the complexion of American politics more than any third-party candidate since Teddy Roosevelt.
* * *
Rapoport and Stone, respectively chairmen of the departments of political science at the College of William and Mary and the University of California at Davis, have recently published “Three’s a Crowd,” an account of the 1992 election and the subsequent Perot phenomenon. One of the surprising conclusions from the book, published by the University of Michigan Press, is that while Perot may well have cost Republican George Herbert Walker Bush his chance for re-election in 1992, his followers influenced the subsequent Republican revolution—beginning with the 1994 Contract with America and culminating after 2000 with victories for the White House, Senate and House of Representatives.
Two descriptions from the 1912 election could be applied to H. Ross Perot. In describing the German Kaiser, Wilhelm II, Teddy Roosevelt once said: “I found him vain as a peacock.” And Hofstadter, in writing of the likes of Woodrow Wilson, spoke of “the ruthlessness of the pure in heart.” Despite his peacock looks and ruthless purity, in 1992 Perot got almost 20 million votes, 19 % of those cast, and denied Bill Clinton a popular majority. His nominating convention was, in effect, an appearance on the Larry King Show when he dared his supporters to get him on the ballots of all 50 states. Collectively 5.3 million citizens signed petitions for Perot, who then campaigned as a classic outsider—for deficit reduction, against immigration and the North American Free Trade Agreement (NAFTA), for term limits, and against government waste. But 1992 wasn’t a good year for the major parties. Despite earlier Gulf War popularity, President Bush the elder was laboring under a cratering economy while voters were having a hard time inhaling the nightlife of the Democratic candidate, Bill Clinton. As an aide said of his boss, Perot was someone there to “fix the damn problem.”
One reason that successful third parties “sting and die” is that one or both of the major parties make takeover bids of the insurgent ideas. Beginning in 1994, the Republicans courted Perot’s supporters and their issues, about which the Democrats were largely indifferent. But according to Rapoport and Stone, Perot’s faithful remain a loose but powerful cannon in American politics. When it rolled to the Republican decks, they won control of the Congress and finally the Presidency. Rapoport and Stone write that, after 1992, “the Republicans reached out to Perot and to the Perot constituency.” They conclude that: “By migrating to one of the major parties, Perot activists carried the potential to change that party’s stands on core Perot issues, such as reform, economic nationalism, and the federal budget.” Even though Perot himself polled only 8 % of the vote 1996 and by 2000 the Reform Party had become a joke—reduced to a scrum for federally-matched funding between the likes of Jesse “the Body” Ventura, Pat Buchanan, and Donald Trump—the bee’s pollen was already allowing the Republicans to flower.
Thinking he could tell me who might be elected the next president in 2008, I called Professor Rapoport at his William and Mary office, where he has worked since 1975. Other than having read his provocative book, I did not know him personally. But I do know and admire his parents, who have made The Bernard and Audre Rapoport Foundation a model of generosity for the causes of literacy and the disadvantaged—although their gift is not so much money but enthusiasm for individuals and ideals.
On the phone Ronald Rapoport compared the looming 2008 election with 1992, in that there is a burgeoning deficit, the aftermath of a Persian Gulf invasion, and little perceived difference between the major political parties. He still believes that the Perot constituency “remains distinctive,” an underground political current looking to vent its populist anger on one of the major parties. But the outcome of the 2006 mid-term election will give him a better idea if the conditions might be ripe, in 2008, for the emergence of a third-party candidacy. He emphasized that the “major parties have to create the opportunity for a third party.” He recalled a line from the book that “one of the ironies of the Perot movement was that it [nominally non-partisan] contributed to one of the greatest upsurges in partisan politics in American history.”
Rapoport speaks about political candidates, third parties, and presidential politics with insight and irony. He thinks the conditions could well be ripe for a third-party in 2008, with all its attendant threats to the established order. (Alexander Pope called political parties “the madness of many for the gain of a few.”) Rapoport speculated that if the 2008 election were between Hilary Clinton and John McCain, he could imagine the Perot bloc swinging toward the Arizona senator, who in 2000 gave his campaign bus the Perot sounding name, “Straight Talk Express.” Ironically, push me, pull-you Perotism might explain, after all, why Bill Clinton has become best friends with the Bushes. Is it to move Hilary’s image into the safe middle ground? Too bad for the Democrats that Perot doesn’t play golf.
Monday, February 06, 2006
TimesUp@NYT
I didn’t give much thought to the financial condition at the New York Times until a few years ago, when the company chose self-flagellation to deal with the plagiarism of Jayson Blair. For those of you who can’t quite find Blair on the radar, he was a young reporter for the newspaper who had been promoted from the ranks of the company’s internship program. It happened that Blair was African-American, so color and affirmative actions lent a subtext to the story, although since American journalism and letters are replete with Caucasians who have invented stories, let’s leave race out of this summary. In my experience, fabrication is an equal opportunity employer.
After September 11, 2001, when the Times needed every warm body in the newsroom to strike keyboards in anger, Blair was promoted from cub reporter to the national desk, where he filed front-page dispatches on such stories as the Washington sniper and the family of Pfc. Jessica D. Lynch. He was a young man in a hurry, like many Timesmen, until another newspaper spotted his cribbed passages. Then a reconstruction of his expenses and phone records showed that, for many of his scoops, he had not been reporting from the heartland but e-mailing his stories from a Starbucks in Brooklyn. Looking at the episode from the vantage of 2005, I sense Blair must have thought himself part of the newer New Journalism, a virtual reporter, gleaning truth from downloaded Web sites, while the Times was still clinging to the quaint tradition that “all the news fit to print” ought to include at least showing up at the fire.
Blair was canned, although never very contrite. Notoriety has its markets, too, and he withdrew to the redoubt of his Web site. Instead of leaving Blair to the spike of history, however, the Times convened a West Side Inquisition and published a 7,397-word story on how many of his fabrications had found their way into the newspaper of record. As if its informed source was the Canon Law of heresy, a Times committee of rectitude intoned: “He fabricated comments. He concocted scenes. He lifted material from other newspapers and wire services. He selected details from photographs to create the impression he had been somewhere or seen someone, when he had not.” They described his actions as a “low point in the 152-year history of the newspaper,” although, without putting in a word for apostasy, I have to say that in one specific dealing I had with a Times reporter, his standards did not strike me as much higher than Jayson’s.
Woven into the Blair stake burning, however, was veiled criticism of the paper’s executive editor, Howell Raines, who had, they discovered, once sent his Jimmy Olson “a note of praise for his ‘great shoe-leather reporting.’” Any reader of Pravda would have known that the central committee at the Times was pointing a Siberian finger at Raines. But he nonetheless convened a staff meeting in a nearby Broadway theatre, to answer questions about Blair’s imaginary friends. He might well have leased the Coliseum and some Roman lions to hear his oration. The assembled reporters and management gave him the thumbs down, and shortly thereafter the newspaper’s publisher, Arthur Sulzberger, Jr., fired Raines—to quell the mobs and to retrieve the paper from the spectacle playing out on the Circus Maximus.
Raines brooded for about a year, and then published his own version of the story, perhaps some 20,000 words, in the Atlantic Monthly. He made the point that he had been the editor of a newspaper with 375 reporters, and 1200 staff members in the news division, and that none of his sub-editors had raised concerns to him about Blair’s sloppiness. Some of his deputies had known that Blair could disappear like Clark Kent, and they suspected he was no Superman. But no one dared tell the chief that Blair’s shoe leather was as ethereal as Perry White’s “great Caesar’s ghost.”
Raines’s Atlantic piece, however, does not dwell on Blair’s Fletch-like deceptions, so much as it makes the point that the Times has serious management issues, which it wasn’t addressing, and he hints at looming financial difficulties. In 2001, Raines had been promoted to the Times editorship as “our Patton,” someone there to mobilize the complacent troops. Phrases in his Atlantic article make it clear that if someone had ever asked him, “How many people work at the Times?” he might have used the caustic response: “About half of them.” In the piece he talks about “manãna journalism…clock-punching atmosphere” and “getting the Times off its glide path toward irrelevance.” As if still composing an in-house board position paper, he writes: “On a newsroom floor with some 1,200 journalistic employees and an even larger, more militantly pro-Guild support staff, where the company is daddy and the union is mommy, no one is supposed to speak publicly about the attitudes of entitlement and smug complacency that pervade the paper.” But by then he was gone and we were hearing about the kinder, gentler Times.
As editor, Raines had wanted to “raise our competitive metabolism” but then found the Times divided between the “culture of achievement and the culture of complaint.” The virtually peripatetic Blair had appealed to him, as he once noted: “This guy’s hungry,” when explaining why he had put him on a big story. Clearly, in ditching Raines as editor, the housecats and cultural complainers had outlasted those from hunger. But Raines is unrepentant through his 20,000 words. At one point he recalls a passage from the memoirs of an earlier editor, Turner Catledge, who wrote: “No one was ever fired at the Times. God was our personnel director.” But the line from the piece that got my attention reads: “But ad sales peaked at $1.3 billion in 2000 and have now settled back into the $1.1 billion range. If those ad revenues were to drop much below that mark, the Times as a business would be severely strapped.”
Just to be clear, I don’t work for the Times. Nor do I own its shares. I have read the paper daily for about 35 years. But more recently, recalling Raines’s dire forecast about ad revenues, and thinking in general that hardcopy newspaper readers are going the way of trolley riders, I decided to read through the paper’s financial statements. A friend of mine who works in a brokerage firm once said to me that he equated statement analysis “to the reading of a sonnet.” For my part, I find the language of annual reports and 10-Ks as difficult to deconstruct as Elizabethan English. But I take his point that both are worth the effort required to read them. Dante Rossetti wrote: “A Sonnet is a coin: its face reveals;/The soul, —its converse, to what 'tis due…”
* * *
At first glance, the New York Times Company appears sound and profitable. In 2004, from the last full-year audited accounts, the company reported net income of $292 million on revenue of $3.3 billion. Its return on equity was more than 20 percent, healthy in any industry. In 2005, it will report net income of $259 million on revenues that were up 2.1 percent to $3.4 billion. During recent years the company has steadily increased its dividend to shareholders, although the yield is a modest 2.4 percent. In 2004, it reported EBITDA (earnings before interest, tax, depreciation, and amortization—a Wall Street mantra for corporate earning power) of $664 million, which implies that even in their sunset years, newspapers can be cash cows. (But don’t confuse your gross pay with what’s left in the envelope.) The company has a market capitalization (shares outstanding times market price) of $4 billion, which is $1 billion more than its rival, Dow Jones, the publisher of the Wall Street Journal. If you were a shareholder, and glanced through the annual report, you might not like the recent drop in the share price from 53 to 27, but you would think NYT (its ticker symbol) remains a solid, if currently unrewarding investment.
The heart of the New York Times Company is the newspaper in New York, the Boston Globe, and a group of daily papers in one-horse towns like Gadsden, Alabama, and Thibodaux, Louisiana. Some years ago, the Times owned some second-tier magazines, but refocused the business on daily papers when they purchased (for $1.1 billion) the Globe in 1993. The company also has interests in radio stations, television, some Internet operations, and several paper mills. The straws stirring the drinks at Sardi’s, however, are daily newspapers, which account for 95 percent of the group’s revenue. And in the so-called News Media Group, 65 percent of the revenue comes from advertising.
At the Times, more and more of the ads are from national advertisers, so its competition is papers like U.S. Today or the Wall Street Journal. At the Globe and among the regional dailies, classified and local ads still account for a larger percentage of the revenue base. In an era when people buy houses and cars, and rent apartments online, the question for the group is whether in the long-term it can keep its local advertising base. When was the last time you “checked the classified ads?” Measured by group column inches, the Times ran slightly fewer ads in 2004 and 2005 than it did in 2002, although total ad revenue for the company increased in 2005 by 3.8 percent. In answer to Raines’s concerns, ad revenue at the Times has increased to $1.26 billion, although that account now includes two radio stations, which it did not when Raines cited his $1.1 billion. (In net terms, the figure for the New York paper is still around $1.1 billion.) Overall, the group has increased ad revenue of $1.9 billion in 2002 to $2.3 billion in 2005, and that is the good news cited to the market whenever concerns are raised about the future of newspapers.
In looking at the group’s circulation, the figures don’t always tell the entire story, as there are good subscribers—those paying the rack rate of $481 per year to have the paper heaved onto to their front porch—and those who pick it up free in front of their hotel bedroom door. That said, the Times continues to have “the largest daily and Sunday circulation of all seven-day newspapers in the United States.” In 2004, the Times had a daily circulation of 1.12 million, and 1.66 million on the Sunday. But between 2003 and 2004, it lost 7.3 percent and 12.4 percent, respectively, in daily and Sunday circulation. In 2005, the Times circulation grew slightly (although revenue in this category was flat) while the Globe gave back the 8.3 percent circulation gain by which it had grown the year before, and the New England Regional Media group’s circulation revenue dropped by 5.7 percent.
Another shift occurred in the location of the readers, who became increasingly national, especially in the case of the Times. About half the readers of that paper now live outside the New York metropolitan area. To give an idea of the paper’s declining presence in its home market, circulation in Manhattan, according to a gleeful New York Post, dropped to about 166,000 during 2004. In the Bronx, the Times only sells about 12,000, hardly enough copies to pass around the luxury boxes at Yankee Stadium.
Bigger than demographic shifts, however, is the dramatic change in all of our newspaper habits. It used to be that we read newspapers at breakfast or while commuting to work on a train or bus. The same pattern might have repeated itself on the way home in the evenings, with a so-called afternoon paper. Now people eat breakfast standing up, if not in the car, and catch up on news all day, from radio, TV, and Web sites. Newspapers tend to lie idle on kitchen tables until after dinner, when they are “flipped through” rather than read in detail. Competition is not from a cross-town paper, but billions of Web sites, 500 cable channels, and multiplex cinemas.
* * *
In 2005, as reported both in the company’s third-quarter Form 10-Q and its press releases announcing year-end unaudited results, what hurt the company more than flat circulation figures was the jump in expenses over the slight increase in revenue. Whereas revenue in 2005 grew 2.1 percent, the company’s total expenses were up 7.9 percent. Interest expense alone was up 17.7 percent, from $42 million to $49 million, although these figures are net of capitalized interest, which in 2004 was $7 million. What makes the income statement of 2005 hard to deconstruct are the extraordinary gains and losses that hit the bottom line. For example, during 2005 the company booked $115 million from the sale of its headquarters. At the same time it took pre-tax charges of $58 million, to cover certain staff reductions, and $11 million in association with a change in accounting principles. Remove the extraordinary gain on the building sale from the income statement, but leave in the charges (which don’t look all that extraordinary), and year-end net income would have been $145 million, as opposed to $292 million the year before—a drop that would explain why the market price of the stock is down 30 percent in the last year.
Not so apparent in the figures is whether having an online edition helps or hurts the bottom line. Among its peers, the New York Times is credited with being ahead of the newspaper technology curve in terms of having developed an excellent Web site, dating to 1996. In 2004, according to Business Week, the online edition was getting around 9 million monthly hits. I am sure it is more now. According to the company, but not available in the financials, is that New York Times Digital earned revenue of $198 million in 2005. It also reported it had about 390,000 subscribers for Times Select, the new online subscription service. Of those numbers, 156,000 customers had paid $49.95 up for complete online readership (the rest get Select as a fringe benefit of a normal subscription). But is this good news or potential bad news? Select clients are now contributing $7.8 million in circulation revenue and, no doubt, driving online ad sales. But the newsstand revenue from 156,000 readers (probably not a perfect analogy; they might not all buy it everyday) would be $75 million. In a larger sense, can the Web site be considered a profit center when it needs the print edition’s 1200 staff members to post articles online? NYTimes.com might even prove an expense item, at least initially, if it forces the Times to convert itself into a 24-hour news gathering organization, with that much more staff and technology investment required.
Moving to the company’s balance sheet (the last figures I have are for the third quarter of 2005 and were filed with the Securities and Exchange Commission), the Times reported total assets of $4.3 billion. It had current assets, such as receivables and inventory, of $572 million, property and plant of $1.4 billion (after depreciation of $1.3 billion over the life of these assets), and $1.84 billion in goodwill and intangible assets. Keep in mind that balance sheets record accounting, not street values. Take NYT to a pawn broker, and he might give you more or less than $4.3 billion for the assets. With a market cap of $4 billion, this would suggest that balance sheet assets are worth considerably more than reported. But market cap assumes a growing company and what accountants call a “going concern.” Liquidation values are something else, as became clear when billions in assets vanished from the balance sheets of companies like Enron and World.com—not to suggest that the Times bears any comparison with those Ponzi-like companies. Most analogous to the Times’s financial situation would be the bind of network news programs, which are losing market share to new technology.
Nor is it clear how well the company’s assets will hold up in a changing world. Take the $1.4 billion line item for property, plant and equipment—in the case of the NYT, many printing centers around the U.S. and now the world. In 1987, the company built a huge printing complex in Edison, New Jersey for a cost of $400 million. Each year, the company records as an expense a portion of the total cost of these assets, on the theory that the plant is wearing out over time, like a delivery truck. But in some cases, property appreciates, and in other cases, depreciation schedules do not match the deterioration of an asset correctly. In other words, little judgment can be made about the company’s $1.4 billion in property unless you were to go door-to-door at the plants, and appraise their value in the local market. But in general, I would not want to be a seller of used newspaper equipment.
* * *
Equally problematic, for anyone reading financial sonnets, are goodwill and intangible assets. In the case of the Times, they are reported at $1.84 billion (more than the company’s book equity). The figure represents the amounts paid for assets over their net book value, and it also recognizes the value of certain trademarks, such as the name “Boston Globe.” Clearly those names, and other properties acquired for premiums, may have substantial value, and they may throw off substantial cash. (Who would not want to own the intangible asset that is the trademark Coca-Cola?) But in a media company, especially one heavily concentrated in newspapers, what represents an intangible asset today—for example, owning the only paper in town—could well become a liability in the future, should readers vanish and should the company be left with expensive union or pension obligations. We still don’t know if newspapers are on the road to Detroit or Silicon Valley. And consider this: if the Times had to write off all of its goodwill and intangible assets, it would be left with negative equity.
Accounting for goodwill is guesswork more than science, and many industries refuse to let their companies consider it as an asset. But media companies can and do. For example, during 2004 the Times paid $65 million to buy out the 50 percent of the International Herald Tribune it did not own. Even though the Herald Tribune was and is continuing to lose money, the invested $65 million is recorded as an intangible asset. But the advantage media companies have other industries that it can depreciate (record as an expense) an annual amount that should correspond with the depleting worth of certain assets, like a trademark or a masthead value. In 2005 and 2004, the Times expensed $143 million and $142 million, respectively, in depreciation and amortization—something accountants call a “non-cash expense.” (It is a cost you don’t cover with hard cash, unless the company establishes a sinking fund to renew the assets at the end of their useful life.) Things like broadcast licenses and mastheads may not lose their value in the way that a truck or plant lose theirs, but these generous allowances have allowed media companies for years to lower taxable income.
Theoretical as some of the Times’s assets could be in the digital future, its liabilities are those of a rust belt industry. Basically, the company is like a car or furniture company, in that it takes a raw material (paper), blends in intelligent designs (words and pictures), runs the work-in-progress through a factory (printing and production), and sells the finished product to consumers. I realize that the editorial board of the Times would prefer to see itself working in the Elysian Fields of intellectual property. But the fact is that the Times is in a smokestack industry that manufactures news, and to do it well means borrowing a lot of money, all of which is listed on the liability side of the balance sheet.
At year-end third-quarter in 2005, the company had almost $1 billion in current or short-term liabilities (another disproportionate figure, which could lead to liquidity issues, given that current assets are only $572 million). It also reported $1.7 billion in long-term obligations, which include anticipated liabilities for pensions and health care benefits. For years, while God was the personnel director of the Times, he generously awarded the employees, after negotiations with various guilds, handsome retirement benefits. Plus we know from Raines that it was impossible to get fired from the paper. General Motors had the same paternalism for its workers. For the Times, these accruing liabilities at third quarter-end 2005 were calculated at $728 million, but that figure could increase, should the company not correctly estimate either the performance of its pension assets or its actual health care costs. Its pension shortfall is estimated at $358 million (gap between assets on hand and future obligations), and it should be noted that the Times has 74 percent of its pension assets at risk in the stock market, a fairly aggressive bet on irrational exuberance.
In addition to shareholder funds of $1.5 billion, the company funds its balance sheet with a variety of short, medium and long-term lines of credit. I give credit to the company’s finance department for its skill in negotiating competitive rates on these facilities. Nevertheless, I notice several concerning trends. First, the company’s overall debt is now $1.4 billion, and interest expense in 2005 was $49 million, net of capitalized interest. Second, the debt-to-equity ratio is now 88 percent. In 1997, that ratio was 37 percent. Third, while cost efficient, the company relies extensively on a short-term commercial paper facility to fund even long-term assets, such as its intangibles and real estate investments. Overall, with the share price dropping, its only sources of long-term funding are in the capital markets, and there the company could be squeezed, should that industry draw negative conclusions about the future of the company’s assets. Also crippling would be another 114-day newspaper strike, as happened in 1962, and which eventually wiped out the intangible assets, and funding, of New York papers like the World Telegram and Journal American.
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Of all the accounts in the Times financial statements, nothing is more revealing than the company’s sources and uses of cash. Basically, what has the Times done with the money that it has earned? Profitable companies have the option of paying more dividends or keeping the money in the business. Raines writes in the Atlantic: “Money is the oxygen of journalism.” But in the case of the Times, little of its free cash was reinvested in the business of searching for the truth. More recently it even made cutbacks in its editorial budget, which Raines reports was $180 million a year. During 2005, the paper announced after-tax charges of $35 million, to cover group-wide staff reductions, with the goal of saving “$50 to $70 million” in 2007 and beyond. That prompted Editor & Publisher to editorialize: “Using the bizarre premise that newspapers can bring back lost circulation and ad revenue by making their products worse, top executives at major chains from The New York Times Company to Tribune took a butcher knife to staffing with buyouts and layoffs that appeared almost epidemic.”
Yes, the Times made a few acquisitions in media-related businesses, including recently a 49-percent stake in a Boston freebie newspaper, Metro. As noted, in 2004, it paid $65 million to acquire the outstanding shares in the International Herald Tribune (circulation about 240,000). But Raines says that the goal of the acquisition was to use it as the platform to launch that paper as the International New York Times. Now the company has backed away from a name change, given reader preference, although the company is clearly investing heavily in this operation. As a reader, I can say it is a better paper than before. But profitability is harder to track. Ad revenues at the Herald Tribune grew 30 and 33 percent in the last two quarters of 2005, although profit and losses for the paper are not broken out of the News Media Group. Elsewhere I have read that the paper used to lose $6-8 million, but that in 2005 this loss has temporarily grown to $25 million, as the Paris-based paper ramps up its reporting and distribution capabilities.
In 2005, NYT paid $410 million for the Web site, About.com, which answers questions on a variety of subjects and that in December 2005 got 29 million hits. Management believes passionately in the investment, stating it will be cash-neutral to the group in 2007, and profitable thereafter. Year-end 2005 figures for the site indicate it had revenue of $44 million and an operating profit of $11.6 million. But that is a gross figure that leaves aside the cost of parent capital to buy a company, without net income, for the aggressive price of about 12 times revenue—on the theory that it will lure advertisers and Web surfers to other NYT products. Recently the paper has also acquired shares in television production companies, with the idea that someday—perhaps like the BBC—the Times will be a seamless source of print, audio, and video news reporting. At the moment, however, video broadcasts on the Web site still look like home movies.
For all that the Times says that its core purpose is to “enhance society” by publishing top-quality news, it has mostly used its free cash, in recent years, to buy back its own shares. According to the 2004 annual report, since 1997 the Times has used $2.9 billion to repurchase “nearly 77 million shares” of the company’s common Class A stock. In the talk of Wall Street, these purchases are known as “stock buybacks.” Usually a company will buy back its own stock, and then cancel the shares, when the company stock is trading at distressed prices but the management believes the company is sound, and worth more than the market believes it to be. (That was the case in 1997.)
Share buybacks are perfectly legal. If done at the right price, they can increase a company’s earnings per share, as net income is divided among a smaller number of outstanding shares. But what is extraordinary about the Times’s repurchase program is both the large amount of committed capital ($2.9 billion isn’t chump change) and the fact that, since 2000, it was undertaken when the Times’s shares were trading at a high multiple. Even today, the company’s multiple is 14 times earnings—a level that rarely generates interest in buying back shares.
Just for the fun of it, I went to About.com and typed in “share buybacks,” and got a primer from “Your Guide to Investing for Beginners,” which reads as follows: “Principle 3: Stock buy back programs are not good if the company pays too much for its own stock! Even though buybacks can be huge sources of long-term profit for investors, they are actually harmful if a company pays more for its stock than it is worth. In an overpriced market, it would be foolish for management to purchase equity at all. Instead, the company should put the money into assets that can be easily converted back into cash.”
Clearly, no one on the Times board surfed its own Web sites before authorizing the recent stock buybacks. By my calculations, since 2002, when the stock hit a record high of $53 a share, the Times has lost $248 million from its buyback program—that figure being the cost of the repurchased stock (until 9/05), as reported in the annual reports, and what those shares would be worth today at the current market price of $27.50. (You can find thousands of words in the Times on Jayson Blair’s expenses, but on this blunder, the paper is silent. Imagine the editorials if someone the Times did not like, a politician or a company, had blown $248 million?)
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Although it hardly explains the volume of shares repurchased, one justification the paper uses, in explaining the buybacks, is that the company has shifted more to a compensation model that links performance with the granting of stock options and restricted stock. That would explain modest share repurchases, not $2.9 billion. It also should be pointed out that most of the options granted since 2002 remain out-of-the-money, which would indicate unhappy staff campers, when it comes to their options. The 2005 earnings release notes that: “In 2005, option exercises were lower than anticipated,” as if maybe that was a cost-saving virtue. But of the company’s 30,799,000 outstanding options at the end of 2004, 29,167,000 had average strike prices between 37 to 46. Wait until Raines assesses the morale of those option holders; he may have a pile of underwater options himself.
Here’s another puzzling fact: normally, when a company aggressively buys back its own stock, the price of its shares tends to go up (given an endlessly eager buyer in the market), as does the ratio that measures earnings-per-share. NYT did go up during the late 1990s, although so did the shares of all media companies during the salad days of the Bubble. But in the Times’s case, earnings-per-share have been flat since 2002, and the price of the stock has tanked. As a market vital sign, that’s alarming.
While writing this assessment, I have spent the most time trying to figure out why a company would relentlessly buy back its own shares—to the extent that NYT has spent more than its net income some years on buybacks and dividends. The obvious answer is that the board believes the company to be undervalued. But I suspect the magic of media-company accounting may also be an incentive, which could work as follows: NYT borrows large amounts in the market and invests in other media companies at huge premiums to book value. (About.com is a perfect example. Its assets could largely be summarized as “Hits Received;” the gold mine is ethereal, not under the Utah desert.) Then the paper depreciates the intangible part of the asset, which lowers taxable income. But new media assets don’t wear out like strip mines, so you can then use depreciation and amortization as cash that will never be called, and then you invest that saving, plus net income, in share buybacks. The purpose is to increase earnings per share and lift the share price, giving shareholders an eventual capital gain (taxed at 15 percent) as opposed to more corporate income (taxed at 39 percent). The scheme, however, only works if the price of the stock goes up. Even if it doesn’t, it leaves the Sulzbergers with a larger percentage of the company, provided that they have not been sellers.
The other thing the company did with its cash was to make a huge bet in New York real estate, again during a bull market. In 2004, the company sold its old building on West 43rd Street for $175 million. Earlier, in 2001, it had committed to pay about $639 million for a majority share of a 52-storey building across the street from Port Authority. (The Times paid $86 million to New York State to clear the lot, evict the tenants, and lease the land for 99 years. Bet you didn’t read the tearful details of that eviction in the paper?) Its minority partner is Forest City Ratner (FC), a real estate company that, as I read the small type, got the better of the Times when it came to cutting the deal. When the tower, which looks like a giant paper shredder, is finished around 2007, the Times will own 58 percent and FC 42 percent. But as the 2004 annual report notes: “Because NYT is funding its contribution equity first, a portion of those funds will be used to fund FC’s share of Building costs (the “FC funded share”) prior to the commencement of funding of the construction loan.” In other words, Ratner gets his 42 percent share for nothing down. The company believes the new headquarters will solve problems ranging from office politics to television production. But Raines is more cryptic, concluding offhandedly: “If and when it is built, the space for the broadcast and digital activities central to the Times’s future will be inadequate.” Gee, Howell, whaddaya want for $639 mill?
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Between the stock repurchases, About.com, and the new building, in recent years the Times will have spent almost $4 billion of shareholder money, and very little of it will have improved the quality of its journalism. Just the opposite, I fear. Without a coherent strategy the board seems to be gambling the company’s future at time when its industry may be in brutal transition. (Witness the owners of the Knight-Ridder chain flogging off its newspapers.)
What may partly explain these quirky corporate decisions—to bet the ranch on newspapers, to buy back the stock, and to flip Port Authority condos—is that the Times is neither a family nor a public company, but an uneasy partnership between the worlds of corporate democracy and trust fund aristocracy. On the front page of the annual report, the company proclaims its core purpose is “to enhance society by creating, collecting and distributing high-quality news, information and entertainment.” That’s slightly different than the “primary objective” of the family trust that controls the board of directors, which is: “to maintain the editorial independence and the integrity of the New York Times and to continue it as an independent newspaper, entirely fearless, free of ulterior influence and unselfishly devoted to the public trust.” Under the first declaration, you can probably justify paying $75 million in 2002 to own 16.9 percent of New England Sports Ventures LLC, owner of the Boston Red Sox, Fenway Park, and its cable network. Under the second, that sounds like more Blairian heresy.
In terms of corporate democracy, the Times is a banana republic. Technically a public company, it has two shareholder classes, Class A and Class B. (In dollar terms, all the shares have the same par value.) Under the by-laws of the company, a 1997 Trust, established by the Sulzberger family as a successor to an earlier trust of Adolph S. Ochs, the holders of Class B shares in the New York Times can appoint 70 percent of the board of directors. Class A shareholders elect the rest. At present, the Sulzberger clan controls about 88 percent of the 1997 Trust, and thus they get 9 of the company’s 14 board seats. In turn, that majority ensures that the family stays in daily control of a company in which it does not own a majority of the shares.
You can read NYT proxy statements until faint and still not calculate the exact holding that the Sulzbergers (who have both A and B shares) have in the Times. Business Week estimates their shareholding at 19 percent (that would represent a market value of $760 million). Other financial reporting services, such as Yahoo!, estimate that outside institutions hold 66 percent of the A shares. Smaller investors would then hold the balance. But neither Arthur Sulzberger, Sr. nor his siblings are any longer officers of the company. As they have placed some of their Times Class A shares in trusts beyond their control, it is difficult to reconstruct the shareholder accounts of the family members. But Yahoo! is conservative to report that insiders control only 5.3 percent of the company, and the New Yorker is exaggerating to write that the family “controls sixty per cent of the voting stock.” In fact, the biggest block of shares are held in custody or managed by T. Rowe Price or related partnerships, such as Private Capital Management. They accounted for 36 percent of the company’s shareholding, as reported by Computershare on January 13, 2006. But it may be that some Sulzberger family shares are held in custody at T. Rowe Price. Who its clients are is not disclosed.
Nevertheless, by controlling a majority of the Class B shares (worth only about $20 million in dollar terms and thus valued at less than 1 percent of the company’s market worth), the Sulzberger family appoints the majority of the board and dominates the management. At present, the company chairman is Arthur Sulzberger, Jr. The rest of the shareholders, who have about $3.2 billion at stake in the company, are along for the ride, like it or not, and a sense of that roller coaster illustrates that seat belts might be in order.
The first thing that strikes you about the Sulzberger-appointed board of directors is how little background any of them have in daily newspapers. Admittedly, Arthur Sulzberger, Jr. worked as a reporter for the Times, and other family members and insiders on the board either still have jobs there or worked in other papers, although rarely in a senior capacity. (The exception is company CEO Janet L. Robinson, who runs the business side of the Times and can recite the figures on want-ad growth in Worcester.) But most of the outside board members might well be overseeing a bank or rental car company. Two directors have experience at IBM, where one, John Akers, was the CEO. The other directors have worked in areas like food, orange juice, pharmaceuticals, engines, and investment banking. They may all be excellent business people. But for a company that earns 95 percent of its revenue from daily newspapers, and of that about 70 percent from advertising, you would think a few of the non-family directors might have spent some time in the industry. (Raines might have been the Bear Byrant of editors, shouting at his team from a towering height. But if I owned the Times, I would want someone with his experience and drive on the board before I would nominate the CEO of Sara Lee.) Lastly, the average age of the board in 2004 was 56—with several members over 70—, which could be old for company that partially lists its business as the Internet. I wonder how many of them listen to Podcasts of WQXR?
In a brave new world, the Times will slowly shift to a high-quality provider of online feed, and its stock market valuation will approach, for example, that of Google, which has a market capitalization of $128 billion and a stratospheric P/E of 99, but which lacks anything as serious online as you can read at the Times. Already the Times can claim to be among the Internet’s top ten in greatest hits. Even at 30 times this year’s depressed earnings, the paper would trade at $53 a share. In a worst case scenario, however, the age of the Internet will kill the golden geese of newspaper circulation and advertising by forcing companies like the Times largely to give away a product that annually costs $3 billion to turn out. In return, they may get millions of hits, and some ad revenue, but not enough income to pay the benefits of the 12,000 employees needed to boot the servers. Alas, the competition is phoning in its stories from Starbucks. And not many bloggers are buying into $1 billion towers.
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Now that the stock is under pressure, and the business of newspapering is uncertain, the board of directors needs to confront the fact that, in a corporate sense, the Times is running out of ideas faster than it is running out of money. With about $4 billion to spend in the last ten years, the company could have paid down third-party debt. It could have sent legions of reporters to Burma or the Bronx. It could have repositioned itself. Or it could have kept the money in the company as capital, to fund the wish of Adolph S. Ochs that the Times remain “independent.” But one thing stock buybacks signal to the market, when the acquired shares are expensive, is that the company has no better ideas as what to do with its capital.
I sense further trouble brewing for the company in the areas of corporate governance. The interests of Class A and Class B shareholders are divergent and untenable. In theory, Class A is there to make money while Class B has the mission of keeping the newspaper independent. No matter who appoints the directors, they have a fiduciary duty to all the shareholders, not just their minders. Imagine what the Times would have written if some troubled public company in recent years had been run by a trust fund of minority shareholders? If the stock keeps going down (as I have written it has gone down to $26.75 and then rebounded over $28), I suspect the current board could be vulnerable to shareholder lawsuits. What would happen if unhappy Class A shareholders were to allege, for example, that the directors, in foolishly repurchasing $2.9 billion in company stock or making other loser investments, were acting more in the interests of the minority Class B shareholders? Personally I think these flyers were ill founded more than deceitful, but I could imagine Messrs. Sarbanes and Oxley taking the charge seriously.
The board could also, for example, break ranks in agreeing that the Sulzbergers—Arthur, Jr., in particular—are the most capable managers to lead the company forward. Who would win that argument? In my view, Class A, after protracted litigation. Raines has this observation: “I had long noticed in business situations that when Arthur was worried, he tended to yell Hi-ho, Silver! and gallop into the middle of things, and also to form committees.” But how many silver bullets are available to the 1997 Trust, which owns 738,810 of the145 million shares in circulation?
In my mind, not that I am a consultant to the enterprise, I think the only hope to reconcile the different objectives of the shareholder classes is to divide the company into two parts. One should be run like a charitable trust, and own the New York Times, according to the principles of the 1997 Trust, if not the tenets of Adolph S. Ochs. It would reinvest profits in an endowment that would maintain the paper’s independence. It would remove the paper, print or otherwise, from the constraints of trying to make money, other than to cover its costs. If it so chose, it could invite both readers and contributors into the financial collaboration, much the way mutual savings banks are owned by their depositors. Reading the trust stipulations, I think the model should be Yale University, not the Gannett chain. As for the rest of the company, I would spin it off to the Class A shareholders and wish them well with the Red Sox, Ratner, the Daily Comet in Thibodaux, LA, and About.com.
Do I think it conceivable that the Times will reconfigure itself, or at least part of the company, into a non-profit corporation? No, I don’t, at least not by choice. I doubt that the Sulzbergers would commit their family fortune to taking the New York paper private, and I doubt that the Class A shareholders would let the cash cow leave the corporate pasture. Watching the shares drop, I think the more immediate problems will come from some distant family members who own the B shares (there are 34 shareholders listed in that class) and who fear losing their inheritance in investments like the Petaluma Argus-Courier. These shareholders could convert into Class A, if no one in the family wants to buy them out, and sell. But the moment the family ceases to become the buyer of last resort for the B shares, the 1997 Trust will lose its influence over the paper, and the Times will become just another media company, being stalked by AOL Time Warner or General Electric.
In the meantime, some of NYT’s incongruous investments may pan out, although you have to wonder about a company that, with $4 billion in its wallet, devotes most of it to buying back its own stock. It reminds me of those authors who order their own books on amazon.com, to boost the book’s rank. Also, the reading of the verse of the financials tells me that the company has a liability-heavy balance sheet: growing short- and long-term debt, increasing pension and health care costs, and capital tied up in intangible assets. In recent quarters, growth in cash flow has not matched the increase in expenses, and interest, in particular, is a heavy burden, which could perhaps reach $60 million this year, if average rates are 4.5 percent. Anyone who owns the shares is betting over the long-term that Internet revenues will more than compensate for vanishing print readers. In conclusion, although I am not saying NYT is broke, I do think the newspaper of record, as you know it anyway, is doomed, either by a dispute among shareholders or Internet market forces.
One of the recent ironies at the Times is that it thought it could divine its soul, or perhaps its future, in reading the entrails of either Jayson Blair’s phone bills or maybe Judith Miller’s subpoenas. Hence all the ritual sacrifices along West 43rd Street, including those of Blair, Raines, and Miller. But the paper’s soothsayers would have done better to start by divining the annual report and Form10-K, although one thing I do know about journalists is that very few of them understand the iambic pentameter of accounting. Raines writes: “I didn’t care what Times people said so long as they broke stories…” and off went Blair to the virtual front porch of the anxious Lynch family. He also writes that: “The Times is it own country, too.” It might have been a good place to send a foreign correspondent. As Jayson Blair would understand, to get there, all you have to do is open the paper’s Web site and click on its financials. You can even do it from Starbucks.
After September 11, 2001, when the Times needed every warm body in the newsroom to strike keyboards in anger, Blair was promoted from cub reporter to the national desk, where he filed front-page dispatches on such stories as the Washington sniper and the family of Pfc. Jessica D. Lynch. He was a young man in a hurry, like many Timesmen, until another newspaper spotted his cribbed passages. Then a reconstruction of his expenses and phone records showed that, for many of his scoops, he had not been reporting from the heartland but e-mailing his stories from a Starbucks in Brooklyn. Looking at the episode from the vantage of 2005, I sense Blair must have thought himself part of the newer New Journalism, a virtual reporter, gleaning truth from downloaded Web sites, while the Times was still clinging to the quaint tradition that “all the news fit to print” ought to include at least showing up at the fire.
Blair was canned, although never very contrite. Notoriety has its markets, too, and he withdrew to the redoubt of his Web site. Instead of leaving Blair to the spike of history, however, the Times convened a West Side Inquisition and published a 7,397-word story on how many of his fabrications had found their way into the newspaper of record. As if its informed source was the Canon Law of heresy, a Times committee of rectitude intoned: “He fabricated comments. He concocted scenes. He lifted material from other newspapers and wire services. He selected details from photographs to create the impression he had been somewhere or seen someone, when he had not.” They described his actions as a “low point in the 152-year history of the newspaper,” although, without putting in a word for apostasy, I have to say that in one specific dealing I had with a Times reporter, his standards did not strike me as much higher than Jayson’s.
Woven into the Blair stake burning, however, was veiled criticism of the paper’s executive editor, Howell Raines, who had, they discovered, once sent his Jimmy Olson “a note of praise for his ‘great shoe-leather reporting.’” Any reader of Pravda would have known that the central committee at the Times was pointing a Siberian finger at Raines. But he nonetheless convened a staff meeting in a nearby Broadway theatre, to answer questions about Blair’s imaginary friends. He might well have leased the Coliseum and some Roman lions to hear his oration. The assembled reporters and management gave him the thumbs down, and shortly thereafter the newspaper’s publisher, Arthur Sulzberger, Jr., fired Raines—to quell the mobs and to retrieve the paper from the spectacle playing out on the Circus Maximus.
Raines brooded for about a year, and then published his own version of the story, perhaps some 20,000 words, in the Atlantic Monthly. He made the point that he had been the editor of a newspaper with 375 reporters, and 1200 staff members in the news division, and that none of his sub-editors had raised concerns to him about Blair’s sloppiness. Some of his deputies had known that Blair could disappear like Clark Kent, and they suspected he was no Superman. But no one dared tell the chief that Blair’s shoe leather was as ethereal as Perry White’s “great Caesar’s ghost.”
Raines’s Atlantic piece, however, does not dwell on Blair’s Fletch-like deceptions, so much as it makes the point that the Times has serious management issues, which it wasn’t addressing, and he hints at looming financial difficulties. In 2001, Raines had been promoted to the Times editorship as “our Patton,” someone there to mobilize the complacent troops. Phrases in his Atlantic article make it clear that if someone had ever asked him, “How many people work at the Times?” he might have used the caustic response: “About half of them.” In the piece he talks about “manãna journalism…clock-punching atmosphere” and “getting the Times off its glide path toward irrelevance.” As if still composing an in-house board position paper, he writes: “On a newsroom floor with some 1,200 journalistic employees and an even larger, more militantly pro-Guild support staff, where the company is daddy and the union is mommy, no one is supposed to speak publicly about the attitudes of entitlement and smug complacency that pervade the paper.” But by then he was gone and we were hearing about the kinder, gentler Times.
As editor, Raines had wanted to “raise our competitive metabolism” but then found the Times divided between the “culture of achievement and the culture of complaint.” The virtually peripatetic Blair had appealed to him, as he once noted: “This guy’s hungry,” when explaining why he had put him on a big story. Clearly, in ditching Raines as editor, the housecats and cultural complainers had outlasted those from hunger. But Raines is unrepentant through his 20,000 words. At one point he recalls a passage from the memoirs of an earlier editor, Turner Catledge, who wrote: “No one was ever fired at the Times. God was our personnel director.” But the line from the piece that got my attention reads: “But ad sales peaked at $1.3 billion in 2000 and have now settled back into the $1.1 billion range. If those ad revenues were to drop much below that mark, the Times as a business would be severely strapped.”
Just to be clear, I don’t work for the Times. Nor do I own its shares. I have read the paper daily for about 35 years. But more recently, recalling Raines’s dire forecast about ad revenues, and thinking in general that hardcopy newspaper readers are going the way of trolley riders, I decided to read through the paper’s financial statements. A friend of mine who works in a brokerage firm once said to me that he equated statement analysis “to the reading of a sonnet.” For my part, I find the language of annual reports and 10-Ks as difficult to deconstruct as Elizabethan English. But I take his point that both are worth the effort required to read them. Dante Rossetti wrote: “A Sonnet is a coin: its face reveals;/The soul, —its converse, to what 'tis due…”
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At first glance, the New York Times Company appears sound and profitable. In 2004, from the last full-year audited accounts, the company reported net income of $292 million on revenue of $3.3 billion. Its return on equity was more than 20 percent, healthy in any industry. In 2005, it will report net income of $259 million on revenues that were up 2.1 percent to $3.4 billion. During recent years the company has steadily increased its dividend to shareholders, although the yield is a modest 2.4 percent. In 2004, it reported EBITDA (earnings before interest, tax, depreciation, and amortization—a Wall Street mantra for corporate earning power) of $664 million, which implies that even in their sunset years, newspapers can be cash cows. (But don’t confuse your gross pay with what’s left in the envelope.) The company has a market capitalization (shares outstanding times market price) of $4 billion, which is $1 billion more than its rival, Dow Jones, the publisher of the Wall Street Journal. If you were a shareholder, and glanced through the annual report, you might not like the recent drop in the share price from 53 to 27, but you would think NYT (its ticker symbol) remains a solid, if currently unrewarding investment.
The heart of the New York Times Company is the newspaper in New York, the Boston Globe, and a group of daily papers in one-horse towns like Gadsden, Alabama, and Thibodaux, Louisiana. Some years ago, the Times owned some second-tier magazines, but refocused the business on daily papers when they purchased (for $1.1 billion) the Globe in 1993. The company also has interests in radio stations, television, some Internet operations, and several paper mills. The straws stirring the drinks at Sardi’s, however, are daily newspapers, which account for 95 percent of the group’s revenue. And in the so-called News Media Group, 65 percent of the revenue comes from advertising.
At the Times, more and more of the ads are from national advertisers, so its competition is papers like U.S. Today or the Wall Street Journal. At the Globe and among the regional dailies, classified and local ads still account for a larger percentage of the revenue base. In an era when people buy houses and cars, and rent apartments online, the question for the group is whether in the long-term it can keep its local advertising base. When was the last time you “checked the classified ads?” Measured by group column inches, the Times ran slightly fewer ads in 2004 and 2005 than it did in 2002, although total ad revenue for the company increased in 2005 by 3.8 percent. In answer to Raines’s concerns, ad revenue at the Times has increased to $1.26 billion, although that account now includes two radio stations, which it did not when Raines cited his $1.1 billion. (In net terms, the figure for the New York paper is still around $1.1 billion.) Overall, the group has increased ad revenue of $1.9 billion in 2002 to $2.3 billion in 2005, and that is the good news cited to the market whenever concerns are raised about the future of newspapers.
In looking at the group’s circulation, the figures don’t always tell the entire story, as there are good subscribers—those paying the rack rate of $481 per year to have the paper heaved onto to their front porch—and those who pick it up free in front of their hotel bedroom door. That said, the Times continues to have “the largest daily and Sunday circulation of all seven-day newspapers in the United States.” In 2004, the Times had a daily circulation of 1.12 million, and 1.66 million on the Sunday. But between 2003 and 2004, it lost 7.3 percent and 12.4 percent, respectively, in daily and Sunday circulation. In 2005, the Times circulation grew slightly (although revenue in this category was flat) while the Globe gave back the 8.3 percent circulation gain by which it had grown the year before, and the New England Regional Media group’s circulation revenue dropped by 5.7 percent.
Another shift occurred in the location of the readers, who became increasingly national, especially in the case of the Times. About half the readers of that paper now live outside the New York metropolitan area. To give an idea of the paper’s declining presence in its home market, circulation in Manhattan, according to a gleeful New York Post, dropped to about 166,000 during 2004. In the Bronx, the Times only sells about 12,000, hardly enough copies to pass around the luxury boxes at Yankee Stadium.
Bigger than demographic shifts, however, is the dramatic change in all of our newspaper habits. It used to be that we read newspapers at breakfast or while commuting to work on a train or bus. The same pattern might have repeated itself on the way home in the evenings, with a so-called afternoon paper. Now people eat breakfast standing up, if not in the car, and catch up on news all day, from radio, TV, and Web sites. Newspapers tend to lie idle on kitchen tables until after dinner, when they are “flipped through” rather than read in detail. Competition is not from a cross-town paper, but billions of Web sites, 500 cable channels, and multiplex cinemas.
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In 2005, as reported both in the company’s third-quarter Form 10-Q and its press releases announcing year-end unaudited results, what hurt the company more than flat circulation figures was the jump in expenses over the slight increase in revenue. Whereas revenue in 2005 grew 2.1 percent, the company’s total expenses were up 7.9 percent. Interest expense alone was up 17.7 percent, from $42 million to $49 million, although these figures are net of capitalized interest, which in 2004 was $7 million. What makes the income statement of 2005 hard to deconstruct are the extraordinary gains and losses that hit the bottom line. For example, during 2005 the company booked $115 million from the sale of its headquarters. At the same time it took pre-tax charges of $58 million, to cover certain staff reductions, and $11 million in association with a change in accounting principles. Remove the extraordinary gain on the building sale from the income statement, but leave in the charges (which don’t look all that extraordinary), and year-end net income would have been $145 million, as opposed to $292 million the year before—a drop that would explain why the market price of the stock is down 30 percent in the last year.
Not so apparent in the figures is whether having an online edition helps or hurts the bottom line. Among its peers, the New York Times is credited with being ahead of the newspaper technology curve in terms of having developed an excellent Web site, dating to 1996. In 2004, according to Business Week, the online edition was getting around 9 million monthly hits. I am sure it is more now. According to the company, but not available in the financials, is that New York Times Digital earned revenue of $198 million in 2005. It also reported it had about 390,000 subscribers for Times Select, the new online subscription service. Of those numbers, 156,000 customers had paid $49.95 up for complete online readership (the rest get Select as a fringe benefit of a normal subscription). But is this good news or potential bad news? Select clients are now contributing $7.8 million in circulation revenue and, no doubt, driving online ad sales. But the newsstand revenue from 156,000 readers (probably not a perfect analogy; they might not all buy it everyday) would be $75 million. In a larger sense, can the Web site be considered a profit center when it needs the print edition’s 1200 staff members to post articles online? NYTimes.com might even prove an expense item, at least initially, if it forces the Times to convert itself into a 24-hour news gathering organization, with that much more staff and technology investment required.
Moving to the company’s balance sheet (the last figures I have are for the third quarter of 2005 and were filed with the Securities and Exchange Commission), the Times reported total assets of $4.3 billion. It had current assets, such as receivables and inventory, of $572 million, property and plant of $1.4 billion (after depreciation of $1.3 billion over the life of these assets), and $1.84 billion in goodwill and intangible assets. Keep in mind that balance sheets record accounting, not street values. Take NYT to a pawn broker, and he might give you more or less than $4.3 billion for the assets. With a market cap of $4 billion, this would suggest that balance sheet assets are worth considerably more than reported. But market cap assumes a growing company and what accountants call a “going concern.” Liquidation values are something else, as became clear when billions in assets vanished from the balance sheets of companies like Enron and World.com—not to suggest that the Times bears any comparison with those Ponzi-like companies. Most analogous to the Times’s financial situation would be the bind of network news programs, which are losing market share to new technology.
Nor is it clear how well the company’s assets will hold up in a changing world. Take the $1.4 billion line item for property, plant and equipment—in the case of the NYT, many printing centers around the U.S. and now the world. In 1987, the company built a huge printing complex in Edison, New Jersey for a cost of $400 million. Each year, the company records as an expense a portion of the total cost of these assets, on the theory that the plant is wearing out over time, like a delivery truck. But in some cases, property appreciates, and in other cases, depreciation schedules do not match the deterioration of an asset correctly. In other words, little judgment can be made about the company’s $1.4 billion in property unless you were to go door-to-door at the plants, and appraise their value in the local market. But in general, I would not want to be a seller of used newspaper equipment.
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Equally problematic, for anyone reading financial sonnets, are goodwill and intangible assets. In the case of the Times, they are reported at $1.84 billion (more than the company’s book equity). The figure represents the amounts paid for assets over their net book value, and it also recognizes the value of certain trademarks, such as the name “Boston Globe.” Clearly those names, and other properties acquired for premiums, may have substantial value, and they may throw off substantial cash. (Who would not want to own the intangible asset that is the trademark Coca-Cola?) But in a media company, especially one heavily concentrated in newspapers, what represents an intangible asset today—for example, owning the only paper in town—could well become a liability in the future, should readers vanish and should the company be left with expensive union or pension obligations. We still don’t know if newspapers are on the road to Detroit or Silicon Valley. And consider this: if the Times had to write off all of its goodwill and intangible assets, it would be left with negative equity.
Accounting for goodwill is guesswork more than science, and many industries refuse to let their companies consider it as an asset. But media companies can and do. For example, during 2004 the Times paid $65 million to buy out the 50 percent of the International Herald Tribune it did not own. Even though the Herald Tribune was and is continuing to lose money, the invested $65 million is recorded as an intangible asset. But the advantage media companies have other industries that it can depreciate (record as an expense) an annual amount that should correspond with the depleting worth of certain assets, like a trademark or a masthead value. In 2005 and 2004, the Times expensed $143 million and $142 million, respectively, in depreciation and amortization—something accountants call a “non-cash expense.” (It is a cost you don’t cover with hard cash, unless the company establishes a sinking fund to renew the assets at the end of their useful life.) Things like broadcast licenses and mastheads may not lose their value in the way that a truck or plant lose theirs, but these generous allowances have allowed media companies for years to lower taxable income.
Theoretical as some of the Times’s assets could be in the digital future, its liabilities are those of a rust belt industry. Basically, the company is like a car or furniture company, in that it takes a raw material (paper), blends in intelligent designs (words and pictures), runs the work-in-progress through a factory (printing and production), and sells the finished product to consumers. I realize that the editorial board of the Times would prefer to see itself working in the Elysian Fields of intellectual property. But the fact is that the Times is in a smokestack industry that manufactures news, and to do it well means borrowing a lot of money, all of which is listed on the liability side of the balance sheet.
At year-end third-quarter in 2005, the company had almost $1 billion in current or short-term liabilities (another disproportionate figure, which could lead to liquidity issues, given that current assets are only $572 million). It also reported $1.7 billion in long-term obligations, which include anticipated liabilities for pensions and health care benefits. For years, while God was the personnel director of the Times, he generously awarded the employees, after negotiations with various guilds, handsome retirement benefits. Plus we know from Raines that it was impossible to get fired from the paper. General Motors had the same paternalism for its workers. For the Times, these accruing liabilities at third quarter-end 2005 were calculated at $728 million, but that figure could increase, should the company not correctly estimate either the performance of its pension assets or its actual health care costs. Its pension shortfall is estimated at $358 million (gap between assets on hand and future obligations), and it should be noted that the Times has 74 percent of its pension assets at risk in the stock market, a fairly aggressive bet on irrational exuberance.
In addition to shareholder funds of $1.5 billion, the company funds its balance sheet with a variety of short, medium and long-term lines of credit. I give credit to the company’s finance department for its skill in negotiating competitive rates on these facilities. Nevertheless, I notice several concerning trends. First, the company’s overall debt is now $1.4 billion, and interest expense in 2005 was $49 million, net of capitalized interest. Second, the debt-to-equity ratio is now 88 percent. In 1997, that ratio was 37 percent. Third, while cost efficient, the company relies extensively on a short-term commercial paper facility to fund even long-term assets, such as its intangibles and real estate investments. Overall, with the share price dropping, its only sources of long-term funding are in the capital markets, and there the company could be squeezed, should that industry draw negative conclusions about the future of the company’s assets. Also crippling would be another 114-day newspaper strike, as happened in 1962, and which eventually wiped out the intangible assets, and funding, of New York papers like the World Telegram and Journal American.
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Of all the accounts in the Times financial statements, nothing is more revealing than the company’s sources and uses of cash. Basically, what has the Times done with the money that it has earned? Profitable companies have the option of paying more dividends or keeping the money in the business. Raines writes in the Atlantic: “Money is the oxygen of journalism.” But in the case of the Times, little of its free cash was reinvested in the business of searching for the truth. More recently it even made cutbacks in its editorial budget, which Raines reports was $180 million a year. During 2005, the paper announced after-tax charges of $35 million, to cover group-wide staff reductions, with the goal of saving “$50 to $70 million” in 2007 and beyond. That prompted Editor & Publisher to editorialize: “Using the bizarre premise that newspapers can bring back lost circulation and ad revenue by making their products worse, top executives at major chains from The New York Times Company to Tribune took a butcher knife to staffing with buyouts and layoffs that appeared almost epidemic.”
Yes, the Times made a few acquisitions in media-related businesses, including recently a 49-percent stake in a Boston freebie newspaper, Metro. As noted, in 2004, it paid $65 million to acquire the outstanding shares in the International Herald Tribune (circulation about 240,000). But Raines says that the goal of the acquisition was to use it as the platform to launch that paper as the International New York Times. Now the company has backed away from a name change, given reader preference, although the company is clearly investing heavily in this operation. As a reader, I can say it is a better paper than before. But profitability is harder to track. Ad revenues at the Herald Tribune grew 30 and 33 percent in the last two quarters of 2005, although profit and losses for the paper are not broken out of the News Media Group. Elsewhere I have read that the paper used to lose $6-8 million, but that in 2005 this loss has temporarily grown to $25 million, as the Paris-based paper ramps up its reporting and distribution capabilities.
In 2005, NYT paid $410 million for the Web site, About.com, which answers questions on a variety of subjects and that in December 2005 got 29 million hits. Management believes passionately in the investment, stating it will be cash-neutral to the group in 2007, and profitable thereafter. Year-end 2005 figures for the site indicate it had revenue of $44 million and an operating profit of $11.6 million. But that is a gross figure that leaves aside the cost of parent capital to buy a company, without net income, for the aggressive price of about 12 times revenue—on the theory that it will lure advertisers and Web surfers to other NYT products. Recently the paper has also acquired shares in television production companies, with the idea that someday—perhaps like the BBC—the Times will be a seamless source of print, audio, and video news reporting. At the moment, however, video broadcasts on the Web site still look like home movies.
For all that the Times says that its core purpose is to “enhance society” by publishing top-quality news, it has mostly used its free cash, in recent years, to buy back its own shares. According to the 2004 annual report, since 1997 the Times has used $2.9 billion to repurchase “nearly 77 million shares” of the company’s common Class A stock. In the talk of Wall Street, these purchases are known as “stock buybacks.” Usually a company will buy back its own stock, and then cancel the shares, when the company stock is trading at distressed prices but the management believes the company is sound, and worth more than the market believes it to be. (That was the case in 1997.)
Share buybacks are perfectly legal. If done at the right price, they can increase a company’s earnings per share, as net income is divided among a smaller number of outstanding shares. But what is extraordinary about the Times’s repurchase program is both the large amount of committed capital ($2.9 billion isn’t chump change) and the fact that, since 2000, it was undertaken when the Times’s shares were trading at a high multiple. Even today, the company’s multiple is 14 times earnings—a level that rarely generates interest in buying back shares.
Just for the fun of it, I went to About.com and typed in “share buybacks,” and got a primer from “Your Guide to Investing for Beginners,” which reads as follows: “Principle 3: Stock buy back programs are not good if the company pays too much for its own stock! Even though buybacks can be huge sources of long-term profit for investors, they are actually harmful if a company pays more for its stock than it is worth. In an overpriced market, it would be foolish for management to purchase equity at all. Instead, the company should put the money into assets that can be easily converted back into cash.”
Clearly, no one on the Times board surfed its own Web sites before authorizing the recent stock buybacks. By my calculations, since 2002, when the stock hit a record high of $53 a share, the Times has lost $248 million from its buyback program—that figure being the cost of the repurchased stock (until 9/05), as reported in the annual reports, and what those shares would be worth today at the current market price of $27.50. (You can find thousands of words in the Times on Jayson Blair’s expenses, but on this blunder, the paper is silent. Imagine the editorials if someone the Times did not like, a politician or a company, had blown $248 million?)
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Although it hardly explains the volume of shares repurchased, one justification the paper uses, in explaining the buybacks, is that the company has shifted more to a compensation model that links performance with the granting of stock options and restricted stock. That would explain modest share repurchases, not $2.9 billion. It also should be pointed out that most of the options granted since 2002 remain out-of-the-money, which would indicate unhappy staff campers, when it comes to their options. The 2005 earnings release notes that: “In 2005, option exercises were lower than anticipated,” as if maybe that was a cost-saving virtue. But of the company’s 30,799,000 outstanding options at the end of 2004, 29,167,000 had average strike prices between 37 to 46. Wait until Raines assesses the morale of those option holders; he may have a pile of underwater options himself.
Here’s another puzzling fact: normally, when a company aggressively buys back its own stock, the price of its shares tends to go up (given an endlessly eager buyer in the market), as does the ratio that measures earnings-per-share. NYT did go up during the late 1990s, although so did the shares of all media companies during the salad days of the Bubble. But in the Times’s case, earnings-per-share have been flat since 2002, and the price of the stock has tanked. As a market vital sign, that’s alarming.
While writing this assessment, I have spent the most time trying to figure out why a company would relentlessly buy back its own shares—to the extent that NYT has spent more than its net income some years on buybacks and dividends. The obvious answer is that the board believes the company to be undervalued. But I suspect the magic of media-company accounting may also be an incentive, which could work as follows: NYT borrows large amounts in the market and invests in other media companies at huge premiums to book value. (About.com is a perfect example. Its assets could largely be summarized as “Hits Received;” the gold mine is ethereal, not under the Utah desert.) Then the paper depreciates the intangible part of the asset, which lowers taxable income. But new media assets don’t wear out like strip mines, so you can then use depreciation and amortization as cash that will never be called, and then you invest that saving, plus net income, in share buybacks. The purpose is to increase earnings per share and lift the share price, giving shareholders an eventual capital gain (taxed at 15 percent) as opposed to more corporate income (taxed at 39 percent). The scheme, however, only works if the price of the stock goes up. Even if it doesn’t, it leaves the Sulzbergers with a larger percentage of the company, provided that they have not been sellers.
The other thing the company did with its cash was to make a huge bet in New York real estate, again during a bull market. In 2004, the company sold its old building on West 43rd Street for $175 million. Earlier, in 2001, it had committed to pay about $639 million for a majority share of a 52-storey building across the street from Port Authority. (The Times paid $86 million to New York State to clear the lot, evict the tenants, and lease the land for 99 years. Bet you didn’t read the tearful details of that eviction in the paper?) Its minority partner is Forest City Ratner (FC), a real estate company that, as I read the small type, got the better of the Times when it came to cutting the deal. When the tower, which looks like a giant paper shredder, is finished around 2007, the Times will own 58 percent and FC 42 percent. But as the 2004 annual report notes: “Because NYT is funding its contribution equity first, a portion of those funds will be used to fund FC’s share of Building costs (the “FC funded share”) prior to the commencement of funding of the construction loan.” In other words, Ratner gets his 42 percent share for nothing down. The company believes the new headquarters will solve problems ranging from office politics to television production. But Raines is more cryptic, concluding offhandedly: “If and when it is built, the space for the broadcast and digital activities central to the Times’s future will be inadequate.” Gee, Howell, whaddaya want for $639 mill?
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Between the stock repurchases, About.com, and the new building, in recent years the Times will have spent almost $4 billion of shareholder money, and very little of it will have improved the quality of its journalism. Just the opposite, I fear. Without a coherent strategy the board seems to be gambling the company’s future at time when its industry may be in brutal transition. (Witness the owners of the Knight-Ridder chain flogging off its newspapers.)
What may partly explain these quirky corporate decisions—to bet the ranch on newspapers, to buy back the stock, and to flip Port Authority condos—is that the Times is neither a family nor a public company, but an uneasy partnership between the worlds of corporate democracy and trust fund aristocracy. On the front page of the annual report, the company proclaims its core purpose is “to enhance society by creating, collecting and distributing high-quality news, information and entertainment.” That’s slightly different than the “primary objective” of the family trust that controls the board of directors, which is: “to maintain the editorial independence and the integrity of the New York Times and to continue it as an independent newspaper, entirely fearless, free of ulterior influence and unselfishly devoted to the public trust.” Under the first declaration, you can probably justify paying $75 million in 2002 to own 16.9 percent of New England Sports Ventures LLC, owner of the Boston Red Sox, Fenway Park, and its cable network. Under the second, that sounds like more Blairian heresy.
In terms of corporate democracy, the Times is a banana republic. Technically a public company, it has two shareholder classes, Class A and Class B. (In dollar terms, all the shares have the same par value.) Under the by-laws of the company, a 1997 Trust, established by the Sulzberger family as a successor to an earlier trust of Adolph S. Ochs, the holders of Class B shares in the New York Times can appoint 70 percent of the board of directors. Class A shareholders elect the rest. At present, the Sulzberger clan controls about 88 percent of the 1997 Trust, and thus they get 9 of the company’s 14 board seats. In turn, that majority ensures that the family stays in daily control of a company in which it does not own a majority of the shares.
You can read NYT proxy statements until faint and still not calculate the exact holding that the Sulzbergers (who have both A and B shares) have in the Times. Business Week estimates their shareholding at 19 percent (that would represent a market value of $760 million). Other financial reporting services, such as Yahoo!, estimate that outside institutions hold 66 percent of the A shares. Smaller investors would then hold the balance. But neither Arthur Sulzberger, Sr. nor his siblings are any longer officers of the company. As they have placed some of their Times Class A shares in trusts beyond their control, it is difficult to reconstruct the shareholder accounts of the family members. But Yahoo! is conservative to report that insiders control only 5.3 percent of the company, and the New Yorker is exaggerating to write that the family “controls sixty per cent of the voting stock.” In fact, the biggest block of shares are held in custody or managed by T. Rowe Price or related partnerships, such as Private Capital Management. They accounted for 36 percent of the company’s shareholding, as reported by Computershare on January 13, 2006. But it may be that some Sulzberger family shares are held in custody at T. Rowe Price. Who its clients are is not disclosed.
Nevertheless, by controlling a majority of the Class B shares (worth only about $20 million in dollar terms and thus valued at less than 1 percent of the company’s market worth), the Sulzberger family appoints the majority of the board and dominates the management. At present, the company chairman is Arthur Sulzberger, Jr. The rest of the shareholders, who have about $3.2 billion at stake in the company, are along for the ride, like it or not, and a sense of that roller coaster illustrates that seat belts might be in order.
The first thing that strikes you about the Sulzberger-appointed board of directors is how little background any of them have in daily newspapers. Admittedly, Arthur Sulzberger, Jr. worked as a reporter for the Times, and other family members and insiders on the board either still have jobs there or worked in other papers, although rarely in a senior capacity. (The exception is company CEO Janet L. Robinson, who runs the business side of the Times and can recite the figures on want-ad growth in Worcester.) But most of the outside board members might well be overseeing a bank or rental car company. Two directors have experience at IBM, where one, John Akers, was the CEO. The other directors have worked in areas like food, orange juice, pharmaceuticals, engines, and investment banking. They may all be excellent business people. But for a company that earns 95 percent of its revenue from daily newspapers, and of that about 70 percent from advertising, you would think a few of the non-family directors might have spent some time in the industry. (Raines might have been the Bear Byrant of editors, shouting at his team from a towering height. But if I owned the Times, I would want someone with his experience and drive on the board before I would nominate the CEO of Sara Lee.) Lastly, the average age of the board in 2004 was 56—with several members over 70—, which could be old for company that partially lists its business as the Internet. I wonder how many of them listen to Podcasts of WQXR?
In a brave new world, the Times will slowly shift to a high-quality provider of online feed, and its stock market valuation will approach, for example, that of Google, which has a market capitalization of $128 billion and a stratospheric P/E of 99, but which lacks anything as serious online as you can read at the Times. Already the Times can claim to be among the Internet’s top ten in greatest hits. Even at 30 times this year’s depressed earnings, the paper would trade at $53 a share. In a worst case scenario, however, the age of the Internet will kill the golden geese of newspaper circulation and advertising by forcing companies like the Times largely to give away a product that annually costs $3 billion to turn out. In return, they may get millions of hits, and some ad revenue, but not enough income to pay the benefits of the 12,000 employees needed to boot the servers. Alas, the competition is phoning in its stories from Starbucks. And not many bloggers are buying into $1 billion towers.
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Now that the stock is under pressure, and the business of newspapering is uncertain, the board of directors needs to confront the fact that, in a corporate sense, the Times is running out of ideas faster than it is running out of money. With about $4 billion to spend in the last ten years, the company could have paid down third-party debt. It could have sent legions of reporters to Burma or the Bronx. It could have repositioned itself. Or it could have kept the money in the company as capital, to fund the wish of Adolph S. Ochs that the Times remain “independent.” But one thing stock buybacks signal to the market, when the acquired shares are expensive, is that the company has no better ideas as what to do with its capital.
I sense further trouble brewing for the company in the areas of corporate governance. The interests of Class A and Class B shareholders are divergent and untenable. In theory, Class A is there to make money while Class B has the mission of keeping the newspaper independent. No matter who appoints the directors, they have a fiduciary duty to all the shareholders, not just their minders. Imagine what the Times would have written if some troubled public company in recent years had been run by a trust fund of minority shareholders? If the stock keeps going down (as I have written it has gone down to $26.75 and then rebounded over $28), I suspect the current board could be vulnerable to shareholder lawsuits. What would happen if unhappy Class A shareholders were to allege, for example, that the directors, in foolishly repurchasing $2.9 billion in company stock or making other loser investments, were acting more in the interests of the minority Class B shareholders? Personally I think these flyers were ill founded more than deceitful, but I could imagine Messrs. Sarbanes and Oxley taking the charge seriously.
The board could also, for example, break ranks in agreeing that the Sulzbergers—Arthur, Jr., in particular—are the most capable managers to lead the company forward. Who would win that argument? In my view, Class A, after protracted litigation. Raines has this observation: “I had long noticed in business situations that when Arthur was worried, he tended to yell Hi-ho, Silver! and gallop into the middle of things, and also to form committees.” But how many silver bullets are available to the 1997 Trust, which owns 738,810 of the145 million shares in circulation?
In my mind, not that I am a consultant to the enterprise, I think the only hope to reconcile the different objectives of the shareholder classes is to divide the company into two parts. One should be run like a charitable trust, and own the New York Times, according to the principles of the 1997 Trust, if not the tenets of Adolph S. Ochs. It would reinvest profits in an endowment that would maintain the paper’s independence. It would remove the paper, print or otherwise, from the constraints of trying to make money, other than to cover its costs. If it so chose, it could invite both readers and contributors into the financial collaboration, much the way mutual savings banks are owned by their depositors. Reading the trust stipulations, I think the model should be Yale University, not the Gannett chain. As for the rest of the company, I would spin it off to the Class A shareholders and wish them well with the Red Sox, Ratner, the Daily Comet in Thibodaux, LA, and About.com.
Do I think it conceivable that the Times will reconfigure itself, or at least part of the company, into a non-profit corporation? No, I don’t, at least not by choice. I doubt that the Sulzbergers would commit their family fortune to taking the New York paper private, and I doubt that the Class A shareholders would let the cash cow leave the corporate pasture. Watching the shares drop, I think the more immediate problems will come from some distant family members who own the B shares (there are 34 shareholders listed in that class) and who fear losing their inheritance in investments like the Petaluma Argus-Courier. These shareholders could convert into Class A, if no one in the family wants to buy them out, and sell. But the moment the family ceases to become the buyer of last resort for the B shares, the 1997 Trust will lose its influence over the paper, and the Times will become just another media company, being stalked by AOL Time Warner or General Electric.
In the meantime, some of NYT’s incongruous investments may pan out, although you have to wonder about a company that, with $4 billion in its wallet, devotes most of it to buying back its own stock. It reminds me of those authors who order their own books on amazon.com, to boost the book’s rank. Also, the reading of the verse of the financials tells me that the company has a liability-heavy balance sheet: growing short- and long-term debt, increasing pension and health care costs, and capital tied up in intangible assets. In recent quarters, growth in cash flow has not matched the increase in expenses, and interest, in particular, is a heavy burden, which could perhaps reach $60 million this year, if average rates are 4.5 percent. Anyone who owns the shares is betting over the long-term that Internet revenues will more than compensate for vanishing print readers. In conclusion, although I am not saying NYT is broke, I do think the newspaper of record, as you know it anyway, is doomed, either by a dispute among shareholders or Internet market forces.
One of the recent ironies at the Times is that it thought it could divine its soul, or perhaps its future, in reading the entrails of either Jayson Blair’s phone bills or maybe Judith Miller’s subpoenas. Hence all the ritual sacrifices along West 43rd Street, including those of Blair, Raines, and Miller. But the paper’s soothsayers would have done better to start by divining the annual report and Form10-K, although one thing I do know about journalists is that very few of them understand the iambic pentameter of accounting. Raines writes: “I didn’t care what Times people said so long as they broke stories…” and off went Blair to the virtual front porch of the anxious Lynch family. He also writes that: “The Times is it own country, too.” It might have been a good place to send a foreign correspondent. As Jayson Blair would understand, to get there, all you have to do is open the paper’s Web site and click on its financials. You can even do it from Starbucks.
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