by Penny, Laura
You may not recognize the name of the man who helped broker the sale for the illegal investors. His name is Leon Black, and he still runs an investment company called the Apollo Group, which participated in the Executive Life deal and helped channel the bonds into a bunch of French fronts that also began with the letter A, like Altus and Artemis. You may not know Black, but you are probably familiar with his former co-worker and crony at Drexel Burnham Lambert: Mike Milken. Milken called the sale of Executive Life “the investment opportunity of the decade” in a 1992 jailhouse interview with Forbes magazine. The junk bond crash, fueled in part by Milken’s indictment and the Drexel investigation, meant that Executive Life was sitting on a lot of cheap assets. Black and the French investors made a killing on the bonds once the junk scare subsided. In 1999, after complaints from angry policyholders, the attorney general and the insurance commissioner filed suit against those involved in the Executive Life deal. In 2002, Black and his associates agreed to testify against the French in exchange for immunity. In 2005, after beaucoup de international legal wrangling, the French investors involved in the suit paid over $600 million to settle the case.
What I find sadly funny about this sordid tale is that the insurance industry won’t sell somebody a measly policy because they’ve got diabetes or a DUI, but somehow, someone with a great weeping ethical sore like “Mike Milken’s Right-Hand Man” on his CV gets to broker the sale of an entire insurance company. The kicker is that the state insurance commissioner put Executive Life up for sale in the first place because the company had suffered losses on junk bonds bought from the boys at Drexel Burnham Lambert. That’s some solid risk management, and some well-managed cross-selling, indeed.
It’s not just the new, integrated financial services companies, like Citigroup and GE Capital, that are placing insurance monies at greater risk. There’s a burgeoning market in reinsurance, too. Reinsurance is when insurers sell insurance on insurance to insurers. When your reinsurer has a reinsurer, then that company is called a retrocessionary. Reinsurers don’t pay out claims, but they help reimburse the insurance companies that do. As previously noted, the reinsurance industry has been helpful in spreading the costs for September 11 among several concerns, but the fact that more than half the balance is being paid out by reinsurers shows the extent of this business, which most of us know very little about. How easy is it to claim your rightful settlement, when insurers sell part of their risks to other insurers, who sell part of their risk to other insurers—and then they sell it to two friends, and so on, and so on? Reinsurance allows insurance companies to write a greater volume of policy risk than they could otherwise absorb, but that may not be in our best interests, since it means that insurers can go overboard with the underwriting, and may end up playing hot potato, tossing losses to the next insurer, who then passes them to another insurer—and so on and so on.
Even eminently savvy people like Warren Buffett and Saul Steinberg lost bales of spondulicks thanks to a reinsurance tangle involving a pool of workers’ comp insurance policies that originated at Unicover, a smallish New Jersey insurer. They were sold repeatedly, by several major firms to several major firms, apparently before anyone had an idea of exactly how much risk they had taken on. There’s a charming name for this practice. It is called “passing the trash.” They probably don’t call it that when they’re selling you a policy, so I doubt you can ask for it by that name. Other dodgy practices by reinsurers have made them part of Spitzer’s insurance probe. General Re—the reinsurance wing of Warren Buffett’s Berkshire Hathaway group—AIG, and Swiss Re are some of the major reinsurers being questioned about “nontraditional insurance products and certain assumed reinsurance transactions.” This is euphemese for “helping our clients cook their books.” The attorney general alleges that some transactions that looked like reinsurance or risk-sharing may have been nothing more than sweetheart loan arrangements.
I don’t disagree with the concept of insurance. People don’t save money, and disease and disaster can strike at any time, so insurance is a necessary evil. However, this necessity is precisely why it is so galling to see insurance monies, private and public, become embroiled in complex, sporadically fraudulent, financial schemes that enrich the fortunate few at the expense of legions of policyholders. Legislation like the Glob channels more insurance money into the wider financial services industry, and Bush’s plan to privatize Social Security dispatches public insurance monies in that general direction as well. All the money people think they are salting away for hospital care, fire damage, car wrecks, hurricanes, and old age is sliding further and further into the capable hands of the nice people who brought you corporate scandals and the stock market bust.
Spitzer isn’t the only one trying to stick it to the great growing Glob of insurance and banking via the courts. In 2005, Britney Spears filed suit against her consortium of insurers. They failed to cough up the $9 million she claimed for losses related to a canceled tour. The insurers argued that Britney had failed to disclose that she had a bad knee when she took out the policies. Since the tour was canceled on account of that same blown knee, her claim was rejected. Britney’s attorneys argue that the insurers were happy to collect more than a million dollars in premiums from the pop tart, and, like, see ya in court. This case, like insurance itself, leaves me of two minds. It is nice to see insurers reject the long, proud tradition of insuring celebrity body parts and enriching the already rich for spurious losses. It is good to know that there is at least one stalwart sector that remains immune to Spears’s dubious charms. On the other hand, Britney filed a claim. Britney lost. Do you have as many lawyers, and as much money, as Britney? If there is no satisfaction for Britney, in the wordy bizarro world of insurance, what chance do we mere mortals have?
CHAPTER EIGHT
Who’s number one? THE CUSTOMER!
—THE WAL-MART EMPLOYEE CHEER
If you were dropped from the sky on the outskirts of Anytown, North America, it would take you a long time to figure out exactly where you were. There would be plenty of signs, but they wouldn’t help much. You would see a big-box store, probably a Wal-Mart or The Home Depot, maybe a mall, with roads and parking in the foreground, and a glass complex or two humming fluorescently in the middle distance. There would probably be three or four kinds of fast-food places close by, but not within walking distance, because nobody walks around these parts. There aren’t even sidewalks here. These are the park-and-drive places, twenty to forty minutes from the heart of downtown Wherever. And they are everywhere. The sprawl in Cali may be surrounded by palm trees, and the ones in Quebec may have signs that say vente instead of sale, but for the most part they are all the same. You got your concrete, you got your offices, you got your hangars full of merchandise, you got your drive-thru grease kiosks, all in one convenient traffic snarl.
There are a couple of different factors that helped these sprawls grow and thrive. The improvement of the highways opened up more space for urbanized land, and urbanization has been the trend ever since. Between 1982 and 1997, according to a study on sprawl by the Brookings Institution, the amount of urbanized land in the United States increased by 47 percent, from about 50 million acres to 76 million. At the same time, the overall population increased by only 17 percent, and only a handful of cities became more densely populated. Increasingly, people settled in suburban communities rather than urban ones. Today, fully half of Americans live in suburbs. There’s a correlation between having more space and buying more stuff: The shopping simply followed the big houses, aching to be filled with wonderful things, to the cheap land on the outskirts of town. Shopping used to be an urban phenomenon, but now it’s primarily a sprawl thing. Most dying downtowns feature the ghostly hulk of a formerly swanky department store, long since lured to the burbs to anchor a mall, or slain by those low, low big-box prices. Environmentalists bemoan this doughnut effect. The city’s historic core rots, leaving pockets of poverty and decrepitude behind. More outlying fields get pa
ved, pollution spreads, and municipalities have to extend the radius of the areas they service. People end up wasting more time, gas, and money in their cars, as well.
There are some downtown malls in larger cities, like Chicago and Boston and Toronto, but the majority are built a drive away from suburban developments, in the sprawl. The big-boxes have also helped contribute to, and further accelerate the growth of, sprawl. Since a big-box takes up more than 25,000 square feet, retailers like Wal-Mart and The Home Depot have always gone for the cheapest land they can find, setting up camp at the edge of town. Then all the other businesses, the fast-food joints and plus-size clothing chains and pet care warehouses and electronics stores and Dollaramas and Buck-or-Two junk shops, soon follow, opening strip malls and big-boxes of their own. And so, a hundred thousand sprawls bloom.
Malls and big-boxes are destination shopping, shrines to the boundless bounty of consumer choice. Remember that last long postwar boom, the one where everyone’s income went up? With this came a new willingness to buy things just for the hell of it, a desire inflamed by advertisers and the ad-makers’ new buddy, television. As theorist William Kowinski put it in his 1985 book, The Malling of America, the mall is an extension of your television; it disposes the products and lifestyle the television proposes. This is not even to mention the way that relatively, if regressively, cheap credit has fueled the flames of constant consumption. North Americans are the world’s greatest consumers. We can, and will, buy anything. Fifteen years ago, hardly anyone drank bottled water, and today little plastic flasks that read naive backwards are as ubiquitous as asphalt. When an oxygen bar opened in Toronto, I didn’t know whether to laugh or weep. Part of me thought, silly yuppies, paying for air. The other part of me pictured my future monthly oxygen bill; luxuries have a sneaky way of turning into utilities. The ability to buy whatever you feel like buying has become like a state religion, the very living manifestation of big, beautiful words like freedom and choice. Shopping isn’t just something that we need to do. It’s something that most of us want to do.
Shopping isn’t just our leisure activity of choice. When the boom went bust and the stock markets were a shambles, who was called on to keep the economy from spiralling into full-blown recession? It wasn’t the CEOs, or the government, or even the military, but you, Joe Visa, and you too, Sally MasterCard. Only the consumers could save us now! Zero percent financing and multiple cuts to the interest rate were all attempts to stimulate the mission-critical shopper. Part of the reason why consuming all that can be consumed, like a ravening pack of piranhas, has been elevated to the status of an inalienable right is that the American economy relies heavily on consumer overspending. Previous generations at war have been urged to scrimp and save and have had their food and goods rationed to help the war effort. The avatars of the war on terror urge us to shop till we drop. Changing, or even questioning, our gluttonous binge consumption would mean that—cliché alert—the terrorists have already won. Immediately after September 11, North Americans were told that the best way they could help New York was to go there for dinner and a show and some shopping. While this was, admittedly, a relief effort closer to most people’s skill sets than signing up for Doctors Without Borders, it was only what we are usually told to do. Which is, in case you missed the 50 million ads, to spend like a Gabor sister with a fresh husband.
Like every minute of every ad, every inch of retail space entices us to buy more stuff. Between 1970 and 2003, the amount of retail space in the U.S. doubled, and then doubled again, from a billion and a half square feet to 6 billion square feet. I have had the pleasure of being part of the vast mall-o-sphere in my own little way, as a wage slave in a bookstore. You bid adieu to a couple of niceties when you work retail. There are no seats for the serfs. Most retail jobs mean standing all the livelong day, for no reason other than to signal to your customers that you are alert to their every whim. Few are the windows in your average mall. There might be an atrium, but there will be no windows. All that outdoors might distract your eyes from the merch. The mall is climate-controlled, which means it’s always the opposite of whatever’s happening outside; in the summer, the mall is blissfully cool, and in the winter, it’s toasty. It is highly unlikely that you will find a clock, unless it’s on sale, because the last thing any store owner or manager wants you to notice is exactly how much time you’ve spent in the mall. That would totally harsh on your retail mellow. The mall has its own time, promotional time. This is holiday-based, and proceeds seamlessly and ceaselessly from New Year’s to Valentine’s Day to St. Patrick’s Day to Easter to Mother’s Day to Memorial Day to Father’s Day to Labor Day/Back to School to Halloween to Thanksgiving to Xmas/Hanukkah. This never-ending holiday is part and parcel of the mall’s effort to be a fun destination, a place you want to go. But it’s a delicate balance; make the mall too comfy-cozy, and freaks who have no intention of buying anything will show up, hang out, and drive the actual shoppers away. If you build a village, even a phony one, eventually, the idiots will come.
In the burbs, malls are pretty much the only place for people to hang out. They are ersatz Main Streets, the gathering places for folks with time on their hands, like seniors and teenagers. Some malls have wholeheartedly embraced the idea of serving as a sort of community center. A few of the earliest mall developments, like Bergen Mall and Garden State Plaza, built in New Jersey in the fifties, included municipal services and meeting rooms for community events. Now that malls are taking it in the face from big-boxes and category killers, many have started renting space out to government and community services, lest they become half-empty dirt malls. But, unlike the town squares of old, or the streets and sidewalks in the city, each and every inch of a mall is privately owned. There have been debates all over North America about whether or not citizens have the right to public assemblies in malls. In the 1980 Supreme Court case of Pruneyard Shopping Center vs. Robbins, the justices ruled that it was up to individual states to decide whether malls were the kind of public spaces where people could get their First Amendment on. Some states, like California, Oregon, Massachusetts, and New Jersey, have all recognized malls as a sort of semi-public space, and have protected speech rights in malls.
This is the sort of thing that sends private-property types into conniptions. I think the malls asked for it, with all those walkways and benches and come-hither plastic foliage. But malls only want to be public insofar as you define public as full of people. Besides, these days, hellraisers setting up leaflet tables at the mall is the least of management’s worries. I’m sure mall developers fairly long for the days when they had to go to great lengths to keep people out of the mall, now that they face the challenge of getting people to go to the mall at all. About a half billion square feet of the almost 6 billion square feet of retail space in the U.S. is vacant, mainly in dead or dying malls. The new urbanist movement calls them grayfields, and in several states they are trying to refashion them into living communities.
Malls aren’t totally dead yet, but they are certainly in decline. The iconic Sherman Oaks Galleria, original home of the eighties Valley Girl, recently closed its doors. Malls have been given a royal beating by a couple of different factors. First of all, micro-malls have leaked into spaces such as offices, airports, and universities. These siphon off some of the burb mall’s revenues, but worse still, in making all the world a mall, they make the mall itself less desirable as a place to go. Internet shopping hasn’t taken off like the geeks hoped it might, but it’s still approximately 44 billion clams that people did not spend at the mall in 2002. The malls that are still very successful, like the West Edmonton Mall and Minnesota’s Mall of America, market themselves as destinations.
The biggest enemy of the mall, however, is the new face of retail, the big-box store. Wal-Mart is, of course, the undisputed king of the big-boxes, the grand poobah of the superstores. Wal-Mart is like Mall Lite, all the tasty stuff with less idle meandering. It supplies a wide selection of different goods, just like
a mall does, but without the architectural frippery, and for slightly lower prices. Retailing doesn’t get much more minimal, ambience-wise, than the Wal-Mart model. Whereas the mall still maintains some semblance of strolling up a street to shop, the big-box store presents you with nothing but the things themselves, in all their cheap profusion. The sheer abundance, if not the quality, of the merch is the star. Each and every Wal-Mart store is simply a giant, fluorescent-lit room, crammed to the unadorned rafters with things, glorious things. Nothing says low, low prices quite like the total absence of decor. No ball room for the kiddies, no coffee for mom, no benches for anyone. Nevertheless, despite the lack of classy blandishments, Wal-Mart is both the number-one retailer and number-one employer in America today. The Walton family has occupied top spots on the annual Forbes listing of the richest people in the U.S. since the eighties. In 1979, Wal-Mart finally cleared a billion dollars in sales. By the nineties, they did that much business in a week. In 2003, Wal-Mart’s net sales were more than $256 billion. In 2004, they did even better, making $285.2 billion.
Sam Walton, the chain’s founder, laid out some of the secrets to his success in his autobiography, Made in America. It’s a dilly of a read, festooned with fulsome blurbs from Ross Perot, Billy Graham, Bob Hope, and Jack Welch—a helluva barbershop quartet—equating Sam with all that is good and great in the grand U.S. of A. Walton tells the Wal-Mart story from his frantic early days buying and selling bulk cheap wares to his eventual success. His eureka moment came when he was a wholesaler of women’s unmentionables. When he tried to sell them for 50 cents, they moved sluggishly. But if he offered three pairs for 99 cents, the panties fairly flew off the shelves. This realization, that lower prices make for greater sales volume, is the cornerstone of the Wal-Mart way. If you make it cheap, people will buy lots more of it, whatever it happens to be.