William Black on the Banking Crisis

Bill Moyers
April 3, 2009
BILL MOYERS: Welcome to the Journal.
For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, the man you're about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.
WILLIAM K. BLACK: These numbers as large as they are, vastly understate the problem of fraud.
BILL MOYERS: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, "How do they get away with it?" Well, no one has asked that question more often than Bill Black.
The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate's so-called "Keating Five" were named — he sent a memo that read, in part, "get Black — kill him dead." Metaphorically, of course. Of course.
Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters."
Bill Black, welcome to the Journal.
WILLIAM K. BLACK: Thank you.
BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we're going through, this economic and financial meltdown is driven by fraud. What's your definition of fraud?
WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, "I create trust in you, and then I betray that trust, and get you to give me something of value." And as a result, there's no more effective acid against trust than fraud, especially fraud by top elites, and that's what we have.
BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: How did they do it? What do you mean?
WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.
BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?
WILLIAM K. BLACK: Yes.
BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?
WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.
BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?
WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that's exactly what happened. Where would you look? You'd look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and what's called Alt-A, liars' loans.
BILL MOYERS: Yeah. Liars' loans--
WILLIAM K. BLACK: Liars' loans.
BILL MOYERS: Why did they call them liars' loans?
WILLIAM K. BLACK: Because they were liars' loans.
BILL MOYERS: And they knew it?
WILLIAM K. BLACK: They knew it. They knew that they were frauds.
WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.
BILL MOYERS: You think they really said that to borrowers?
WILLIAM K. BLACK: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.
BILL MOYERS: Ninja?
WILLIAM K. BLACK: Yeah, because no income verification, no job verification, no asset verification.
BILL MOYERS: You're talking about significant American companies.
WILLIAM K. BLACK: Huge! One company produced as many losses as the entire Savings and Loan debacle.
BILL MOYERS: Which company?
WILLIAM K. BLACK: IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion.
BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?
WILLIAM K. BLACK: No, and that's a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, "Trust, but verify." They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.
BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?
WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."
BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.
WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.
BILL MOYERS: You're describing what Bernie Madoff did to a limited number of people. But you're saying it's systemic, a systemic Ponzi scheme.
WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn't even get into the front ranks of a Ponzi scheme...
BILL MOYERS: But you're saying our system became a Ponzi scheme.
WILLIAM K. BLACK: Our system...
BILL MOYERS: Our financial system...
WILLIAM K. BLACK: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."
BILL MOYERS: Is there a law against liars' loans?
WILLIAM K. BLACK: Not directly, but there, of course, many laws against fraud, and liars' loans are fraudulent.
BILL MOYERS: Because...
WILLIAM K. BLACK: Because they're not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.
BILL MOYERS: Why is it so hard to prosecute? Why hasn't anyone been brought to justice over this?
WILLIAM K. BLACK: Because they didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic...
BILL MOYERS: Who did?
WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.
BILL MOYERS: You talk about the Bush administration. Of course, there's that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they're going to slash, cut business loose from regulation, right?
WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other — three of the other guys with pruning shears are the...
BILL MOYERS: That's right.
WILLIAM K. BLACK: They're the trade representatives. They're the lobbyists for the bankers. And everybody's grinning. The government's working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.
BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton's Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?
WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.
BILL MOYERS: What did AIG contribute? What did they do wrong?
WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?
BILL MOYERS: And why...
WILLIAM K. BLACK: How mad is this?
BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?
WILLIAM K. BLACK: Well, that, especially after what's just happened at G.M., that's... it's scandalous.
BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That's a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who's covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.
BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.
TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.
Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.
WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.
BILL MOYERS: As?
WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.
BILL MOYERS: How is this happening? I mean why is it happening?
WILLIAM K. BLACK: Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.
BILL MOYERS: What facts?
WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?
BILL MOYERS: You--
WILLIAM K. BLACK: Taking away people's bonuses?
BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you're seeming disillusioned now.
WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.
BILL MOYERS: In other words, they could have closed these banks without nationalizing them?
WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.
BILL MOYERS: And that's a law?
WILLIAM K. BLACK: That's the law.
BILL MOYERS: So, Paulson could have done this? Geithner could do this?
WILLIAM K. BLACK: Not could. Was mandated--
BILL MOYERS: By the law.
WILLIAM K. BLACK: By the law.
BILL MOYERS: This law, you're talking about.
WILLIAM K. BLACK: Yes.
BILL MOYERS: What the reason they give for not doing it?
WILLIAM K. BLACK: They ignore it. And nobody calls them on it.
BILL MOYERS: Well, where's Congress? Where's the press? Where--
WILLIAM K. BLACK: Well, where's the Pecora investigation?
BILL MOYERS: The what?
WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?
What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.
BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: You are.
WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, "We just can't let the big banks fail." That's wrong.
BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?
WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We've seen how horrific AIG -- and remember, they kept secrets from everyone.
BILL MOYERS: A.I.G. did?
WILLIAM K. BLACK: What we're doing with -- no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.
Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.
BILL MOYERS: Even though Goldman Sachs had a big vested stake.
WILLIAM K. BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.
BILL MOYERS: Yeah, like a conflict of interest, it seems.
WILLIAM K. BLACK: Massive conflict of interests.
BILL MOYERS: So, how did he get away with it?
WILLIAM K. BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.
BILL MOYERS: Who's going to get the facts?
WILLIAM K. BLACK: We need some chairmen or chairwomen--
BILL MOYERS: In Congress.
WILLIAM K. BLACK: --in Congress, to hold the necessary hearings. And we can blast this out. But if you leave the failed CEOs in place, it isn't just that they're terrible business people, though they are. It isn't just that they lack integrity, though they do. Because they were engaged in these frauds. But they're not going to disclose the truth about the assets.
BILL MOYERS: And we have to know that, in order to know what?
WILLIAM K. BLACK: To know everything. To know who committed the frauds. Whose bonuses we should recover. How much the assets are worth. How much they should be sold for. Is the bank insolvent, such that we should resolve it in this way? It's the predicate, right? You need to know the facts to make intelligent decisions. And they're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.
BILL MOYERS: So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?
WILLIAM K. BLACK: That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse. If they understand how bad it is, they'll run for the exits."
BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.
WILLIAM K. BLACK: Yes.
BILL MOYERS: Why?
WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.
BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker's income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?
WILLIAM K. BLACK: Right.
BILL MOYERS: It was relatively a handful of people.
WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don't prosper. So, instead of being bad for capitalism, it's what saves capitalism. "Honest purveyors prosper" is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn't need to happen at all.
BILL MOYERS: When you wake in the middle of the night, thinking about your work, what do you make of that? What do you tell yourself?
WILLIAM K. BLACK: There's a saying that we took great comfort in. It's actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, "It is not necessary to hope in order to persevere."
Now, going forward, get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system.
So stop that current system. We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what's failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.
BILL MOYERS: William Black, thank you very much for being with me on the Journal.
WILLIAM K. BLACK: Thank you so much.

Digital Publishing: Solutions for Content Providers

Newspaper, magazine and book publishers are presented today with challenges to their core business model. Revenue from readers and advertisers is in decline and the opportunities for shoring up these losses are slow in coming. The vast majority of daily newspapers in the US and Europe provide their content online without charge and internet access is available in over 80% of all households. Free web content is, in affect, stealing subscriptions away from the very publishers providing the content. In the US the decline of the newspaper industry has taken on momentous proportions. On average half as many journalists are employed in the US today compared to 1990. Declining readership automatically leads to a decline in advertising revenue. In addition, the readers who tend to move from paid print media to free online media belong to the younger generations, groups particularly attractive to advertisers. Although advertisers are moving more and more to the online market, the vast majority of revenue generated through advertising remains in print. The online market has not been able to generate the levels of revenue commonplace in the print market. According to Jack Shafer in his 2006 article on slate.com, a newspaper gets about one-tenth or one-twentieth the advertising revenue for an online reader as it does for a print reader.

This article is designed to sum up the present market situation for content providers, make some predictions about the future and present various solutions for maintaining subscription and advertising revenue.

Rupert Murdoch, CEO of News Corp, said in August, 2009 “Quality journalism is not cheap, and an industry that gives away its content is simply cannibalising [sic] its ability to produce good reporting”. He continued by saying that his news sources, including the Times and The Sun in the UK, and the Wall Street Journal and the New York Post in the US, would soon begin charging for online content. The New York Times has also announced that it will severely limit access to free news on its website from January, 2011. These radical, yet bold moves could signal a major change in the newspaper industry and a last-ditch effort to regain revenue. According to Richard Pérez-Pená (New York Times, January 20th, 2010), “Starting in January 2011, a visitor to NYTimes.com will be allowed to view a certain number of articles free each month; to read more, the reader must pay a flat fee for unlimited access. Subscribers to the print newspaper, even those who subscribe only to the Sunday paper, will receive full access to the site without any additional charge”.

While the newspaper industry is suffering the most from the decline of readership and ad revenue, the future of the magazine and book industry is also far from certain. A new generation of tablet PC’s like Apple’s iPad are causing quite a stir among industry analysts. If tablet PCs turn out to be what they promise and present such an enjoyable reading experience, consumers may begin shifting to digital magazines and books. As can be seen in the music industry over the past ten years, new technologies, including iTunes and mp3 players, can have a far-reaching effects on revenue models. The overwhelming majority of revenue from music sales today comes from online services. The film industry is also presently going through a revolution due to the rapid rise in online sales. Blockbuster, the market leader in video rentals, has recently declared bankruptcy, largely due to competition from online and mail-in services like NetFlix. The illegal distribution of movies over the internet, moreover, will certainly influence box office and rental sales. New technological innovations and changing consumer behavior may also encourage magazine and book readers to migrate to digital reading devices.

As can clearly be seen, content publishers need to react to changing conditions. We can assume that newspapers will soon discontinue or severely limit free web news. Book publishers will increase marketing efforts in electronic publishing. Magazines will begin offering online, interactive versions of their magazines. Is that enough, however, to help newspapers regain levels of revenue previously gained through ads and subscriptions? Publishers need to create new business models that serve the needs of the new digital generation. High quality journalism has its price. Some may argue that newspapers and magazines used to be over-inflated institutions with too much power. It can hardly be of doubt, however, that newspapers and magazines play a vital role in a democratic society. They help form public opinion and thus must remain diverse and independent. Although there is a myriad of so-called bloggers out there reporting and writing news articles, the “blogosphere” can not be a replacement for professional journalism. Many European countries guarantee the continuation of independent news through state-sponsored public television and radio. The dominance of private media outlets in the US should encourage people to look more closely at the European model.

How, then, should media publishers respond to the threat to their traditional business model? First, they need to move away from free online content. High quality journalists cost money and that money has to somehow be earned. It’s a risky situation and no media outlet wants to be the first to shut down free access to their website. People are worried that if they limit access their readers will just click over to the next free website. This will drastically reduce website visits, leading to a reduction in advertising revenue. Newspapers will also lose access to readers and publishers ability to communicate with them. If, however, major outlets like the New York Times and the Wall Street Journal set the stage for subscriber-only web news, it will make it easier for other to follow in their tracks. The loyalty of readers to their local newspaper should also not be underestimated. Web users will always find free news content, but if their favorite local newspaper is no longer available they may well feel inclined to pay.

The second response publishers need to take is to look carefully at their customer’s behavior. What are they willing to pay for? How much are they willing to pay? What type of information are they looking for that goes beyond simply a digital version of the printed publication? Over the past years consumers have grown used to getting information for free. It will take some work to convince readers that quality journalism is worth paying for. According to a survey by the Nielsen Group in February, 2010 of 27,000 consumers across 52 countries, 40% of consumers are willing to pay for newspaper content online. That rather optimistic figure is, however, somewhat dampend by a big ‘if’. Nielsen also found that 70% of the people surveyed would only pay for online news if it was better than that which they currently get for free. That can be interpreted to mean that consumers will avoid paying as long as possible. As long as they see opportunities to get the information they are looking for for free and as long as the quality is ok, they will be hesitant to pay. Publishers are then in a situation where they have to compete with multiple content providers. They need to create content that is superior to the competition. The fact that free content is not going to go away quickly makes it difficult to compete. If one farmer (farmer A) is offering slightly blemished apples for free and farmer B is offering perfect apples for 2 dollars a kilo, few will refuse the free ones. F armer B can, though, appeal to the consumers conscience by mentioning that farmer A stole his apples (assuming this is the case). Farmer B could also sell a few apples if she proves that her’s are organic and the other guy’s are not. Established newspaper and magazine publishers have the resources, experience and understanding of the market to make that bold move and begin offering excellent digital content. Many consumers will recognize the superior quality and be willing to pay.

In judging consumers willingness to pay for online content it is necessary to look at recent software and hardware developments. The readiness of consumers across the globe to pay for services online has grown drastically over the past ten years. Platforms like eBay, Amazon and iTunes have proven that people are willing to pay online. ECommerce today plays a central role in business activities. One reason for the success of online systems like eBay and iTunes is the ease of use and this is key to the success of paid news content. The astronomical increase in sales of music, Apps, movies and now books at Apple’s iTunes Store is a sign of the willingness for users to pay for online content. Apple’s easy-to-use, click-and-pay system has been very successful and has lowered the psychological barriers to paying online. People do not want to have to register separately each time they go shopping. Systems like PayPal have also made online payments much easier.

Another aspect is the amount of products available at one source. If someone is looking for used goods or bargains on new goods they hardly need to look further than eBay or Amazon. A music or film enthusiast can be pretty certain that by visiting Apple’s iTunes she will find what she’s looking for. This does, unfortunately, speak for centralized services and is not particularly conducive to anti-trust policies. There is justified critique that Apple, for example, has become too powerful in the music sales industry. Perhaps future open source platforms can successfully deal with these concerns. Nonetheless, consumers do respond positively to a single software solution that addresses all of their needs. It would be terribly time-consuming and discouraging if one had to visit multiple websites in order to find the best offer for a certain album. If newspapers, magazines and books were also available on such a popular platform, it would significantly increase consumers willingness to pay for such digital media.

Aside from software, attractive hardware is also key to judging consumer’s inclination to pay for online content. Despite the fact that computers and the internet have become so ubiquitous, we still prefer holding our newspaper in our hands and reading it at the dinning room table with a cup of coffee. Few people actually prefer reading a book on their laptop. What about tablet PCs? Are they going to change our reading habits? Is the hype about Apple’s new iPad just a hype or do people really enjoy reading “For Whom the Bell Tolls” on that nifty, little device? It is too early to tell where the development of improved “eReaders” will lead and how consumers will react. The chance that it will encourage people to read digital material, however, is significant and thus should encourage publishers to invest in the development of digital content.

A third step publishers can take to react to the new landscape in their industry is to cooperate with online platforms or create their own. The German Spiegel magazine is now available as a subscription only “App” for the iPhone and iPad. The New York Times also offers a commercial App which provides a more user-friendly version of their daily paper for mobile readers. Apple recently added books to it’s iTunes Store and is apparently planning to present a newspaper subscription platform for the iPhone and iPad (“Apple to announce subscription plan for newspapers”, John Boudreau, Sept. 14, 2010, San Jose Mercury News). Apple wants to take a 30% cut of the subscription fee and 40% cut of the advertising revenue. To what extent the newspapers will have access to the subscriber’s information remains a contentious issue.

The New York Times has announced the creation of Press Engine, a platform designed to help publishers deliver their content to digital readers like Apple’s iPad. This system differs from Apple’s planned newspaper publishing through the iTunes Store in that the publishers will be able to control their own advertising and subscriptions. The U.K.’s Daily Telegraph and the Dallas Morning News are among the early adopters who plan to contribute to Press Engine.

Google is also rumored to be preparing its own version of a subscription platform for news content. Googles Newspass would provide a system allowing publishers to charge readers for content.

The German company, Neofonie, is planning an alternative platform. It is also the producer of the tablet WePad. The Bertelsmann Direct Group und Grüner+Jahr will launch it’s own digital publishing platform called “Pubbles” at this year’s Frankfurt Book Fair in October.

The fourth, and perhaps most difficult, measure publishers need to take is to increasingly invest in developing new concepts for digital content. It is not sufficient to simply put a pdf Version of a newspaper online and expect readers to jump at the offer. The digital generation has become quite sophisticated and has high expectations. Moreover, as mentioned above, there needs to be a tangible increase in the quality of the content to encourage consumers to pay. Digital publishing opens an entirely new mix of possibilities in interacting with readers and consumers. Digital media has a set of issues that differentiate it from printed media. Print media has been, of course, limited to ink on paper. Now, with publishing solutions for the internet, iPads and high-resolution smart phones, publishers can utilize video, audio, 3D and animations to engage new readers. These technologies also offer new opportunities for advertisers to communicate their message.

One major aspect now available to the publishing industry is video content. Not only can advertisers utilize this medium, more importantly news, analysis or text book content can integrate video material to enhance the message. We will increasingly see a merging of print, audio and film. Up until now television has not been able to integrate text and print media has not been able to integrate video and film. Just imagine the possibilities if the New York Times could utilize video technology just as successfully as ABC or CNN.

The possibilities for improving upon the format for transmitting news and books continues from there. Text books on iPads could include interactive quizzes, physics simulations or virtual chemistry experiments. Digital newspapers can offer expandable images, audio clips and interactive, 3D animations to their readers. The creation of this content obviously is costly. Many assets, however, are already available at the publishing houses and need only be converted and integrated. By simply viewing some of the websites of major newspapers it is, moreover, apparent that publishers are already investing in the development of multimedia content. Up until now, though, they have been giving it away for free.

Taking a closer look at developments in the text book industry also helps gain more insight into the choices publishers need to make. In early 2010 a consortium of educational publishers, including McGraw-Hill, Houghton Mifflin Harcourt and Kaplan teamed up with the company ScrollMotion to begin producing textbooks for the iPad. Other eReaders like the Kindle were seen by the group as insufficient for the needs of students. Evan Schnittman of Bloomsbury Publishing names three types of reading which need to be addressed when creating digital material; extractive reading, immersive reading and pedagogic reading. Extractive reading, for example looking up synonyms or definitions in a dictionary, is conducive to digital media and already widespread as can be seen by the success of Wikipedia. Fast and expansive search machines make reference work on the computer much easier than paging through a stack of encyclopedias on your desk. Immersive reading refers to reading books, journals or extensive articles. eBooks are addressing this market and tablet readers are serving these needs. The third type of reading, pedagogic reading, represents the greatest challenge for content producers, school book publishers in particular. Pedagogic readers are, for example, studying a chemistry textbook in preparation for mid-term exams. Serving this group of readers has proven to be elusive. Of course, students avidly use the internet to prepare for exams or to do research for a report. School book publishers, however, are confronted with the daunting task of moving material into the digital world. Could tablet PCs like the iPad be the solution to moving digital material into the classroom?

In order to save their business model, newspaper publishers will need to develop new concepts for regaining lost ground due to free internet news. Magazine and book publishers also need to react to changing technologies and reader’s habits and increasingly invest in digital publishing.


References

“Zeitungen rüsten sich für digitale Zukunft”, Sept. 22, 2010, Schwäbisches Tagblatt

“The Times to Charge for Frequent Access to Its Web Site”, January 20th, 2010, Richard Pérez-Pená, New York Times

“A Textbook Solution”, Elizabeth Weil, Sept. 16, 2010, New York Times

iPad and Education, http://www.apple.com/education/ipad/

“Apple to announce subscription plan for newspapers”, John Boudreau, Sept. 14, 2010, San Jose Mercury News (http://www.mercurynews.com/business/ci_16075454?nclick_check=1)

“Changing Models: A Global Perspective on Paying for Content Online”, Nic Covey, February 16, 2010, nielsenwire, (http://blog.nielsen.com/nielsenwire/global/changing-models-a-global-perspective-on-paying-for-content-online/)

“War’s das?”, October, 2009, Kurt W. Zimmermann, NZZ Folio

“Murdoch signals end of free news”, August 6, 2009, bbc news, http://news.bbc.co.uk/2/hi/8186701.stm

“Moving into multiple business models, Outlook for Newspaper Publishing in the Digital Age”, 2009, PriceWaterhouseCoopers

“Google’s Newspass: Is the King of Free About to Help News Providers Get Paid?”, David Carr, June 20, 2010, New York Times

“Chronicle of the Newspaper Death Foretold, The newspaper industry knew it was doomed 30 years ago”, Jack Shafer, November 30, 2006, www.slate.com

Report from No NATO Protests

It was a strange day on the German-French border near Strasburg. I entered the city just a few hours after Barack had shaken hands with Angie and Nicolas on the nearby bridge joining the two countries.. Barack and his 20 some NATO partners walked across the bridge over the Rhine and were greeted by a friendly handshake by the smiling French prime minister, Nicolas Sarkozy. I marched with about 5000 peaceful protestors to the banks of the Rhine and was greeted by a wall of German police. Unlike my compatriot Barack I wasn’t even allowed to step foot on the bridge. No friendly handshakes either. All I got were stone-faced stares from big, green policemen with big, white helmets.
It was an eery welcome I received. The bus I was on entered the border town of Kehl around 11 in the morning. The city was like a ghost town. The streets were lined with barricades, police buses were everywhere, small groups of demonstrators began to appear. Even though it was Saturday morning, the stores were all closed, the parking lots empty, the streets occupied only by police cars, police buses and police trucks. It’s a small city with a population of about 30,000 but there wasn’t a soul to be seen. It actually reminded me of the border region (or no-man’s land) between East and West Germany before the fall of the Berlin Wall.
Our march of about 10,000 peaceniks made it to the Rhine bridge but not one centimeter further. The police blocked our entrance to the bridge and after seeing the dark smoke rising from the French side of the bridge I was certain they were not going to let us cross. As I’ve heard on the news there were violent riots in Strassburg, culminating in a hotel being set on fire. The German news only picked up on the violent protestors. I thinks this is again a lesson to the peace movement that we should not pay attention to how the news media reports on our events. We have to continue the struggle, unite and mobilize.

War Resistor André Shepherd in Tübingen

On Saturday, March 28th, the local theater house in Tübingen, Germany hosted an evening with the war resistor André Shepherd. The play “My Brother Tom” from the director Bettina Erasmy was performed. The piece depicts two sisters in a reality TV show and their brother suffering the trials of war. A central message of the play was the maddening effects war has on the soldiers and their families. The brother Tom was missing in action and the two sisters entered a reality TV show competition, in order to win the prize of being allowed to join the war and search for their brother. A totally absurd concept which, however, demonstrates how war can make people do stupid and crazy things.
After the play the director, André Shepherd, Henning Zierock from Culture of Peace, some of the actors and I (from the Tübingen Progressive Americans conducted a panel discussion. About half of the 150 visitors remained for the discussion. André spoke of his decision for deserting from the US Army and how he came to apply for asylum in Germany. There was a lot of interest and support for his case and we discussed just what could be done to assist people who reject war.

Protesting and the Green New Deal

Johann Hari made a great statement in his article “Why we need the protests” in The Independant on April 3, 2009 about the G20 and No Nato protests. He argues that the current economic and environmental crises make it totally necessary for the people to go to the streets. Only with strong pressure from the people and a powerful social movement will the governments be persuaded to take action.
A Green New Deal is exactly what the world needs right now. From a Keynesian point of view governments need to pump borrowed money into the economy to get it going again. After the economy is healthy again the money needs to be payed back. A Green New Deal would jump start the economy and at the same time help avert the global climate crisis.

Why we need the protests
Johann Hari: The protesters are the ones we should listen to at this summit
The way out of the credit and the climate crunch is the same - a Green New Deal
Friday, 3 April 2009
When this hinge-point in human history is remembered, there will be far more sympathy for the people who took to the streets and rioted than for the people who stayed silently in their homes. Two global crises have collided, and we have a chance here, now, to solve them both with one mighty heave – but our leaders are letting this opportunity for greatness leach away. The protesters here in London were trying to sound an alarm now, at five minutes to ecological midnight.
Many commentators seemed bemused that the protesters focused on the climate crunch as much as the credit crunch. What's it got to do with a G20 meeting on reviving the global economy? Why wave banners saying 'Nature Doesn't Do Bail-Outs' today? Because both crises have their roots in the same ideology – and both have the same solution.
We are facing a collapsed economy and a rapidly warming world because an extreme ideology has dominated world affairs for decades. It is the belief that markets aren't just a useful tool in certain circumstances; they are an infallible mechanism for running human affairs. If the economy ebbs, the market will put itself right by punishing wrong-doers. If the climate begins to unravel, business will rectify its own behaviour voluntarily. Now we know how well this market fundamentalism works.
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Read the complete article from Johann Hari.
j.hari@independent.co.uk

Banks and the Free Market

Robert Misik wrote an interesting article in this week’s Freitag, a German newspaper, Misik discusses the problem of presenting alternatives to our present capitalist system. The word “socialism” is often heard in leftist circles and the tone of the mainstream debate on how to rescue the system sounds much more radical than we’ve heard in a long time. Across the party spectrum in Germany the ideas of nationalizing banks has become normal.
One thing he spoke of is particularly noteworthy. He mentioned how the financial sector is innately unsuitable for the game of free market capitalism. Actors in the free market are subject to the dangers of risk. This is what makes the system more “efficient”. If a company or even a market sector fails to survive the dog-eat-dog fight on the field, they collapse and disappear. A particular company may be eaten up by a competitor or their business may simply close and their products disappear. Banks, on the other hand, can not collapse or simply file for bankruptcy and then open up shop down the street. A bank has it’s customers money on their books. The federal government insures that the customers will not lose their money in case the bank fails. This means a bank can partake in risky business without fear of bankruptcy.
Up until the 1980’s the US had a system of stringent regulations to prevent banks from abusing this situation. The deregulation in the era of neoliberalism has presented banks and other financial institutions with an invitation to take advantage of the system. Today we have a situation where financial institutions are broke, they don’t have the collateral for the money they have lent. They can’t be allowed to go bankrupt like businesses in other sectors because customers would lose their savings. This all shows that banks should either be nationalized or more strictly regulated. I would vote for nationalization. In the last 20 years we’ve seen how easy it is to abolish a regulatory system.

Who made this mess?

Matt Taibbi’s piece in this weeks Rolling Stone Magazine is a great analysis on how the US got into the mess it’s in. What are credit-default swaps and how do they help a few schmucks get filthy rich? Why are huge banks and insurance companies allowed to carry out their business with virtually no governmental oversight?
There’s no doubt the US economy, and the whole world’s for that matter, is in big trouble. Not much to debate on that. The question is how we got into this mess in the first place. Taibbi presents a convincing argument that specific political decisions (most under a Democratic clock) are responsible. It was all legal. AIG and Citibank were given free reign when Congress passed the Gramm-Leach-Bliley Act in 1999, which essentially began a cycle of massive deregulation of the finance industry. It laid the ground work for such dubious constructs as credit-default swaps (CDS). These god-awful things would simply have been illegal prior to the deregulation craze of the 90’s. Credit-default swaps essentially allow financial institutions (you can’t just call them banks anymore) to lend money without significant (or in some cases without any) cash reserves to back those loans. They are basically lending money they don’t have and raking in the interest.
It’s not a morality issue. You can’t expect bankers not to take advantage of the system if the government invites them to do it. It’s the US government making conscious decisions about deregulating the financial industry. Some argue that it’s all so difficult to understand. Is that an excuse for passing stupid laws? If a Congressman doesn’t understand a law he just signed, then he’s either negligent or corrupt. Both of which are reason enough to throw him out of office. Those congressmen who did actually understand what it meant to overturn the Glass-Steagall Act (a law from the thirties which prevented banks from selling insurance) should also be dethroned. Why weren’t they all thrown out of office? Was it all too complicated for the public to understand? Taibbi argues that the Democrats got behind deregulation because they were in search of a new, wealthy base for financing their elections.
So we had a situation of greedy Democrats looking for generous campaign contributors and happy, go-lucky Republicans always game on helping their rich friends get richer. They went about tearing down a system of checks and balances that had prevented banks from acting like madmen. Now we have the US folk bailing out AIG because their “too big to fail”. Here in Germany they’ve come up with great doublespeak, calling companies like AIG “system relevant”. People seem to be buying it. We can’t let ‘em fail or our whole system will collapse like a house of cards. If we don’t want the house to collapse on our heads then we better at least start dismantling it and start building a new one.

The Big Takeover
Matt Taibbi, Rolling Stone Magazine, March 19th, 2009
It's over — we're officially, royally fucked. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country's heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.
Read the rest...