The Fine Print: How Big Companies Use "Plain English" to Rob You Blind (29 page)

Judge Strine’s word for all of this—“disturbing”—seems much too mild. But it also fits the judge’s decision merely to speak harshly of what he saw and then let the deal go through to the detriment of El Paso shareholders, who thus received neither unfettered advice nor the best
price. The El Paso case serves as a reminder that the ancient principle of sale to the highest bidder is too often set aside.

A LECTURE FROM MR. SMITH

Just days after Judge Strine issued his ruling in February 2012, Goldman got slapped again, this time by one of its own. Greg Smith quit Goldman Sachs after twelve years. His resignation letter came in the form of an op-ed column for the
New York Times
in which he wrote that, at Goldman, “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.” He described a toxic environment in which callous “talk about ripping clients off” was so accepted that in e-mails, executives referred to Goldman clients as “Muppets.”

Smith wrote of “derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.”

Gone from the 143-year-old firm was a culture of “teamwork, integrity, a spirit of humility, and always doing right by our clients,” Smith wrote. In its place was one concern: making money. “This alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.”

Goldman issued a damage-control statement belittling Smith as just one of twelve thousand Goldman employees, though one with the title of vice president. He was in fact head of Goldman’s United States equity derivatives business in Europe, the Middle East and Africa.

A decade before Smith quit in disgust, Nomi Prins did the same. A Goldman analyst who specialized in highly complex mathematics and derivatives, Prins became vexed when she was asked how to design derivatives to help turn a profit for people who had invested in the life insurance policies of AIDS patients. The development of new drug regimens let people live longer with the disease, wiping out profits from those who had placed bets that AIDS patients would die soon. That left Prins disgusted. But what finally drove her to quit was the reaction on Goldman’s oil trading desk on 9/11. No one she was with quite understood what was
happening, but they knew that all the phones at the World Trade Center were dead. Once the traders realized the first plane had hit one of the Twin Towers, their reaction was to debate what trades would make Goldman money. As people who knew they would die tried to make cell-phone calls to their loved ones before time ran out, the question of the day at Goldman Sachs was “how do we trade this?”

No business sector can do more damage to an economy and a society than finance. The potential losses are virtually unlimited, as shown by the simple fact that in 2008 the stated value of all derivatives far exceeded the net worth of the entire planet. By wrapping unsound financial products in fancy names like
credit default swap
and
collateralized mortgage-backed securities
, the wizards of Wall Street can practice modern alchemy—until one of their formulations blows up. But just as the philosopher’s stone never turned lead into gold, the mortgage-backed securities turned out to be as toxic as lead, and the implications for the average person very real.

The 2008 meltdown cost every thirty-fourth person in America his or her job. Then the federal government compounded the irresponsible greed of the financiers by committing what, in the worst case, would have been the entire economic output of the nation for an entire year to rescuing the very same derivatives trading houses and failed commercial banks whose alchemy had just been exposed as bankrupt.

Phil Angelides, the California businessman and politician who headed the Financial Crisis Inquiry Commission, has a warning about all of this. On a budget of less than $10 million, the commission produced a solid, 545-page report so well done that no critic has identified a single factual error. The budget was a fraction of what was spent investigating President Clinton’s lying about sex with an intern, an indication of Washington’s confused priorities when it comes to spending taxpayer money. The response to Angelides’s report made clear that Congress did not want to know what really happened and that it didn’t want to stem the flow of campaign money, private jet trips and lucrative jobs for those leaving office. Congress would not even pay to have it archived on the Internet, which is why the report and supporting records are at Stanford University’s Web site. Washington effectively threw it in the trash can.

Angelides says failure to heed what the commission found is not without its risks. His blunt assessment of what to expect unless we change our ways: “It’s going to happen again.”

16.
Bob Manning enjoyed
a wonderful life in northern New York. He grew up near the border with Quebec in a land of lush green summers, colorful falls and winters deep with snow for frolicking. Manning married well. At age twenty-six, his wife Helen had borne one son and was carrying a second. Manning secured a job as an electric power lineman, which kept him outdoors where he could work his long, lean muscles. It even paid well. He made union wages and winter storms ensured a fair amount of overtime pay.

One freezing February afternoon he was working twenty-five feet up a pole near the St. Lawrence Seaway, the system of locks that lets large ships move between the Great Lakes and the Atlantic Ocean. As the soft light of a short winter day began yielding to darkness, Manning’s boss hollered up that it was time to come down. Just then a bolt of electricity flung Manning into the air. Manning hit the pavement head first, snapping his neck between the fifth and six vertebrae.

Manning was desperately looking for someone to help him collect his workers’ compensation benefits when we met in 1997. He fell in 1962. While a thirty-five-year fight by a paralyzed man to collect benefits to which he was entitled may seem extreme, it is unusual only in how long it continued. Manning had won more than thirty orders to pay him his benefits, yet he hadn’t gotten satisfaction.

The cruel reality that would emerge in the years after we met was that, for Manning, the worst was yet to come.

STAYING SAFE

American workers in every state are supposed to be protected by laws that provide both medical care and income if they are hurt on the job. That is one legacy of the tragedy of the Triangle Shirtwaist Company fire in 1911 that killed those 146 young women and so shocked the public conscience that reforms began across America. Some reforms dealt with worker safety, including fire-escape drills now common to workers in office towers. Fire departments began making inspections, including checking that exit doors opened.

A century ago, the factory’s two owners paid the families of the 146 dead less than $1,000 each in today’s money. The fire insurance company paid the owners more than five times that much, allowing the factory to reopen. Two years later one of the owners again locked his workers in (recall that the locked doors in 1911 had accounted for most, perhaps all, of the deaths). This time no one died. The fine assessed was less than $200 in today’s money.

In 2004, retail giant Walmart admitted that, for fifteen years, some managers had been locking workers inside its stores after closing. A Walmart vice president explained that it was for the workers’ own safety in high-crime areas, but workers told different stories. Some said they worked at stores in areas with hardly any crime, suggesting that Walmart’s famous strategies to squeeze more profits, rather than protection from burglars, was the real motive. Others told of being trapped inside Walmarts and Sam’s Club stores after heart attacks, after accidents or as hurricanes approached; one man told of being unable to leave when his wife went into labor. Shortly after reporter Steven Greenhouse of the
New York Times
began asking around about lock-ins, the company changed its policy. Walmart headquarters did not end the lock-ins, but it did make sure night managers had keys to unlock fire-escape doors.

While luckily none of the locked-in Walmart workers died, a Texan named Rolan Hoskin wasn’t so fortunate. He worked at McWane Inc., a privately owned maker of cast-iron water and sewer pipes, at its factory east of Dallas.

In the eight years from 1995 through 2002, McWane, which employed
5,000 workers, reported 4,600 workplace injuries, though there is good reason to believe the actual number of injuries was much higher. Nine McWane workers died on the job. The safety record at McWane was far worse than all six of its competitors combined.

On the day he died, Hoskin, who made less than $10 an hour, was at work deep inside a giant machine with a conveyor belt, which the law required to have a suspenders-and-belt safety system. Not only were safety catches required, but the machine was supposed to be turned off when someone was working on it. There were no safety devices, however. When the conveyor started up, Hoskin was caught in it and crushed. He was forty-eight.

Only after a joint investigation by PBS’s
Frontline
, the Canadian Broadcasting Corporation and the
New York Times
were prosecutions of McWane’s executives begun. In 2006, four were convicted of multiple felony charges based on evidence showing that safety rules at the plant were routinely flouted and reports falsified.

A similar story unfolded at the West Virginia coal-mining firm Massey Energy Company, where twenty-nine miners died needlessly in the Upper Big Branch mine explosion in 2010. Much later prosecutors sought two low-level indictments over what they said were determined management efforts to obstruct enforcement of the mine safety laws, including falsifying records and disabling equipment that detects explosive gases. Documents and testimony also made clear that Don Blankenship, Massey’s CEO, fought safety efforts because he believed they reduced profits, which in turn would reduce his income (he was by far the highest-paid person in that poor Appalachian state, making more than $20 million in some years).

Government safety inspectors, at least some of them, knew what was wrong and tried to act at both McWane and Massey and no doubt many other companies where worker safety was compromised. But there are too few inspectors. In the name of shrinking government spending, the ranks of job-safety inspectors have been continually cut, and those who remain are overwhelmed with complaints, weakening enforcement. Without backing from the ever-changing political appointees at the top, real correctives are becoming rare.

When a safety inspector does decide to get tough, many companies can call on their political connections, as the Massey coal case shows. In 2006, CEO Blankenship vacationed in Monte Carlo on the French Riviera. He shared meals and fine wines several times with his friend Spike Maynard and the single men’s female companions. At the time, Massey
had a $50 million case on appeal before the West Virginia Supreme Court, whose chief justice was Spike Maynard. A year later Justice Maynard voted in favor of Massey. Few knew then about the French connection—only after photographs emerged of Blankenship and Maynard partying (ten other photos were filed under court order, leaving us to wonder what frolicking they depict) did Chief Justice Maynard recuse himself from a rehearing in the case. But that was not the end of the machinations.

Massey Energy contributed more than $3 million to help elect Brent Benjamin to the West Virginia Supreme Court, an amount far greater than any other in West Virginia campaign history. The money was used against another candidate whom Blankenship feared would vote against Massey in the same case. When that case resurfaced before the court, the duly elected Justice Benjamin did indeed vote in favor of his political donor. This resulted in a suit and, eventually, a U.S. Supreme Court ruling on the propriety of Benjamin’s conduct. In 2009, the Supreme Court found that Justice Benjamin should have recused himself. The impropriety here is so obvious that it is hard to understand why the ruling was 5-4 instead of unanimous.

The dissenting opinions are revealing. Justice Antonin Scalia belittled the majority. “In the best of all possible worlds, should judges sometimes recuse even where the clear commands of our prior due process law do not require it? Undoubtedly. The relevant question, however, is whether we do more good than harm by seeking to correct this imperfection through expansion of our constitutional mandate in a manner ungoverned by any discernable rule. The answer is obvious.”

Of course there is an obvious rule: elected judges should not participate in cases where any party before them has donated to help them or hurt their opponent.

Far more troubling was the dissent by Chief Justice John Roberts, who saw nothing amiss because the Massey funds went not to Justice Benjamin’s campaign but to an “independent” organization working against his opponent. In this dissent we got a broad hint of the decision that, a year later, would become the notorious
Citizens United
decision permitting corporations to spend unlimited sums to influence elections as long as they do not hand cash directly to candidates.

In the Massey appeal, Roberts wrote: “It is true that Don Blankenship spent a large amount of money in connection with this election. But this point cannot be emphasized strongly enough: Other than a $1,000 direct contribution from Blankenship, Justice Benjamin and his campaign had
no control over how this money was spent. Campaigns go to great lengths to develop precise messages and strategies. An insensitive or ham-handed ad campaign by an independent third party might distort the campaign’s message or cause a backlash against the candidate, even though the candidate was not responsible for the ads.”