Ted Forstmann

A brief note about the passing Sunday of financier Theodore Forstmann. Mr. Forstmann was a founder of Forstmann, Little and Company in the late 1970s. The firm was a pioneer of the so-called leveraged buyout, or LBO, a practice of issuing debt with which to buy up whole companies. It was a precursor to the active "private equity" transactions of recent years.

Ways of the World remembers Mr. Forstmann, who died of brain cancer at age 71, because he did this well, made good use of the money generated and was not in it for the celebrity. Several of the firm's late transactions during the technology bubble around 2000 resulted in losses, but generally, the companies involved and their managements were markedly improved through the shake-ups that the LBO actions brought about.

So much bad publicity has accrued recently to Wall Street types and to the abuse of debt and leverage, that we really do need to highlight someone like Mr. Forstmann. As in our critical commentary below about recent U.S. Congress deficiencies, the positive sentiments about Mr. Forstmann come from press at both ends of the political spectrum. We found information in the New York Times and we cite in particular an editorial today in the Wall Street Journal which documents Forstmann's work with underprivileged children. He founded the Children's Scholarship Fund with $50 million of his own money and has raised nearly $500 million all together. The fund provides private school educations and has served 123,000 children with affiliate organizations in 33 states.

To quote the Journal: "Ted Forstmann lived a life of purpose that showed how entrepreneurs who succeed both create wealth and spread it around in ways that enrich us all."

The "Super Committee" Does Nothing

In recent days, we have continued to ponder the concerns of the Occupy movement, and we were starting to prepare an article based on an important statement issued a week ago by the Right Rev. Mark Sisk, Episcopal Bishop of New York. We have in mind to combine quotes from his statement with some recently published information on inequality, poverty and economic mobility.

However, we have to put that off a bit in order to stop and comment on our Congress.

Last summer, during the budget and debt-ceiling brouhaha, their actions consisted of a stop-gap bill along with the appointment of a special "Super-Committee", which was given the mission of designing spending and tax measures that would halt the exorbitant expansion of our national debt. This bi-partisan blue-ribbon group was to report by November 23 and its decisions were to have been accepted and ratified as is, without amendment, by the Congress before December 23. Instead, the committee announced late Monday afternoon that they have been unable to reach any agreement – about anything.

Good grief.

We've consulted conservative and liberal press reports, and both sides express the same disgust we just did. It's really discouraging, just before Thanksgiving, to feel such disdain for our national leadership.

The Washington Post neatly summarizes the deadlock: "Although Republicans offered to raise taxes by $300 billion over the next decade, they insisted on conditions that all but guaranteed that the wealthy would not be hit hard. And Democrats refused to agree to deep cuts in spending on health care for the poor and the elderly unless the rich were forced to make greater sacrifices."[1]

Always understand that "raising taxes" and "cutting spending" are meant in these usages to be relative to baseline projections, not current levels. So no one is talking about an absolute decrease in Medicaid or Medicare spending, but about a reduction in the growth rate of those programs. Further, it is widely accepted by many on both sides that some orderly restraint of medical expenditures is needed and there have been concrete proposals from others to start work toward that end.

The concept of taxing the "wealthy" is fuzzier. As you have read in this blog before, the "wealthy" pay a good portion of our taxes now and that share has increased since the Bush Tax Cuts were enacted in 2001. Even so, it is argued by many that allowing these tax cuts to expire at the end of 2012, at least for upper income brackets – so their taxes go up – is one of fairest ways to restrain our budget deficit.

Apparently over the past three months, no progress was made in finding routes to compromise on these issues. Reuters news service indicates that a number of secret sessions worked toward "trust building" among committee members, but the evidently premature leak of one specific proposal to the press about two weeks ago eroded much of that effect.[2]

Even as the Super Committee failed to do its job, several major issues will present themselves to Congress during December. A collection of current tax breaks will expire on December 31, most notably the reduction in the payroll tax rate every employee is currently enjoying. So everyone across the income board will see some tax increase in their first January paycheck. Companies have been writing off the value of business investments in new capital equipment all at once for tax purposes and that will end. A special tax credit for other business R&D will end. And the extended unemployment insurance benefits – out to 99 weeks – will expire, reverting to 26 weeks. In the ordinary course of annual budget work, a temporary spending authorization expires in mid-December and will need to be renewed or individual department appropriations bills will need to be enacted all at once to avoid a government shutdown. Then, by next spring, the debt will reach the current debt ceiling, and we will need to go through some process of raising it again. Since that will be in the middle of the Republican primary season and on the edge of the major campaigning, it seems hard to visualize that definitive work will occur at that time on long-term solutions. Spending cuts, especially in defense, were mandated in last August's "stop-gap" legislation, subject to Super Committee over-ride; since the Committee did not act, those will take effect, but that won't happen until January 2013.[3]

We keep looking today as we write for some constructive conclusion. Perhaps one of you can offer one. Our government is not alone in facing these disputes and having trouble working through them. Virtually all of Europe is up against the same kinds of issues, and they have largely been unable to compromise toward a positive end either. In the U.S. this inaction has been combined in the last several days with further revelations about the way many Members of Congress become personally rich while in office; they can make their own personal investments based on information they receive from companies, regulators and institutions as part of their work.[4] For the rest of us, that practice is called "trading on inside information" and it is illegal. But Congress is exempt from those laws. As some have said lately, if you want to find some of the now-infamous 1%, go to Capitol Hill.
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The footnotes that follow are just ordinary news stories. But we cite them to indicate in particular that the information and concern indeed come from media known to lean both toward the Left and toward the Right. It's not often one finds such agreement. A headnote to the Insider Trading story in [4] says that both the Republican Speaker of the House and the Democrat House Minority Leader objected to the "60 Minutes" story. Legislation has already been introduced to correct the situation. We'll see.

[1]Lori Montgomery & Paul Kane, "Supercommittee announces failure in effort to tame debt," The Washington Post, November 21, 2011. www.washingtonpost.com. Accessed November 22, 2011.

[2]Richard Cowen, et.al., "Insight: Super Committee Had Glimpse of Elusive Compromise", www.reuters.com. November 22, 2011. Accessed November 22, 2011.

[3]Wall Street Journal Research, "Looking Ahead" [box attached to "Debt Panel Fails to Reach Deal"]. www.wsj.com. Accessed November 21, 2011.

[4]Steve Kroft, "Congress: Trading Stock on Inside Information?" CBS "60 Minutes". Segment aired November 13, 2011. Web transcript: http://www.cbsnews.com/8301-18560_162-57323527/congress-trading-stock-on-inside-information. Accessed November 22, 2011.

Mediation in Store for "Occupy London" and St. Paul's Cathedral

We have been deeply concerned in recent days with the crisis of leadership at St. Paul's Cathedral in London over the intrusion onto their property of people participating in the London version of Occupy Wall Street, an entity calling itself Occupy London Stock Exchange (OccupyLSX). Three officials of the venerable and deeply significant institution of St. Paul's have resigned during the last week over the closing of the Cathedral for some days, the first closure since the air-raids over London in World War II. The resignations include the Dean of the Cathedral and the Chancellor, who each resigned for opposite reasons, the Chancellor because he was appalled that the Cathedral would shut out these people and the general public, and the Dean because he was criticized for doing so and for supporting legal action to have the protesters removed from Cathedral grounds.

Then, just late this afternoon (Tuesday, November 1), Episcopal News Service reported that the Cathedral, now being guided by the Bishop of London, has backed away from a strong legal stance. In kind, the City of London has paused in its own legal actions while an effort at connection is made with the protesters.

In a most imaginative move, the Cathedral has engaged Ken Costa, a prominent investment banker and active layperson in the Church of England, to lead an effort to interact with the protesters. Costa, formerly a senior executive at UBS and Lazard International in London, is the Chairman of Alpha International, an organization that presents courses in Christianity to people generally unacquainted with religion. A Warden of his local Church of England parish, he is also the author of God at Work, a book that endeavors to connect business and God. Costa will, according to the Cathedral's website, "spearhead an initiative reconnecting the financial with the ethical. Mr Costa will be supported by a number of City, Church and public figures, including [former Cathedral Chancellor] Giles Fraser, who although no longer [on the Cathedral staff], will help ensure that the diverse voices of the protest are involved in this."

This is the most positive development we have seen in the entirety of the Occupy Wall Street movement, and it is heartwarming to see that some constructive effort is being made to connect the protest with the piece of society against which it is protesting. Isn't it exciting that it's the Church who seems to be taking the leadership role here, and it's not a financial critic who's coordinating the response, but a financial market participant. We will watch it closely. And if you notice some similarity between the themes of Mr. Costa's work and those of Ways of the World, so do we. You'll hear much more about this effort from us.

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See the Episcopal News Service story: http://www.episcopalchurch.org/81808_130370_ENG_HTM.htm
St. Paul's website: http://www.stpauls.co.uk/
The site connected with Mr. Costa's work: http://godatwork.org.uk/ . See especially his article beginning on the homepage in which he describes a visit at OccupyLSX; this was written for the Financial Times and I read it there Monday, not aware of Costa's connection to the Church.