The Fine Print: How Big Companies Use Plain English to Rob You Blind

by David Cay Johnston

  Taxpayers are not the only ones Goldman abuses. Consider its role in the $21 billion takeover of the El Paso Corporation, the owner of the pipeline that killed the twelve campers in New Mexico. A Delaware judge, Leo Strine, called what Goldman did in facilitating the sale “disturbing.” In the past, Goldman had been accused of having a conflict of interest involving Kinder Morgan, the owner of the pipeline. When founder Richard Kinder took Kinder Morgan private by buying out other shareholders, Goldman Sachs was his partner. Their tactics were such that the shareholders who were forced out sued. Goldman paid $200 million to settle the claim but, as has become standard, Goldman neither admitted nor denied wrongdoing.

  In the deal before Judge Strine in early 2012, Goldman advised El Paso, recommending it accept Kinder Morgan’s offer for its shares. Some big El Paso shareholders thought they should get a lot more for their shares and they sued, too. In fact, Goldman had a huge interest in giving its client (El Paso) bad advice to sell itself cheap: Goldman owned almost one-fifth of Kinder Morgan and had two people on the Kinder Morgan board. The less El Paso shareholders got, the more Goldman’s Kinder Morgan stake would be worth. This is about as clear and obvious as any conflict of interest can be.

  We’re not done. Douglas Foshee, the El Paso chief executive who personally negotiated the sale with Kinder Morgan’s Rich Kinder, wanted to carve out part of the property for himself in a later deal. The lower the price Kinder Morgan paid El Paso, the less Foshee would have to pay later to get the property he wanted. Goldman knew about this blatant conflict of interest, too, but went ahead anyway, advising El Paso shareholders to accept the lowball buyout offer from Kinder Morgan.

  When these conflicts of interest became known, a second adviser was brought in—the banking firm of Morgan Stanley. The terms of its fee did not suggest it would be independent. Morgan Stanley was to be paid, the judge explained in his opinion, only if El Paso was sold to Kinder Morgan. If any other deal was reached, Morgan Stanley would get nothing. That, of course, created an incentive for Morgan Stanley to look favorably on a deal for which it would get $20 million versus any other deal, lest it be paid nothing. In this, Judge Strine noted, Goldman had narrowed the range of advice Morgan Stanley was likely to offer to only that which benefited Goldman.

  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…

  Please Die Soon

  The company knows that if I don’t get the medical care I need I will die sooner. That is their strategy. They want me to die.

  —Bob Manning

  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 twent
y-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.”

  What chance, you may well ask, does a solitary victim like Bob Manning have in a rigged system in which someone as intellectually corrupt as John Roberts sits as chief justice of the United States?

  SEEKING COMPENSATION

  We’ve all seen exposés on local television stations showing a cop, a firefighter or some other worker on disability laying bricks or wielding a shovel in his garden despite an allegedly debilitating back injury. That is cheating and should be pursued. But it is penny-ante abuse compared to the injustice of cases like Bob Manning’s.

  First, a little background. Workers’ compensation insurance is tremendously profitable. In California, for example, insurers made more profit than they paid out in benefits to injured workers and the families of dead workers’ in 2004 through 2007. According to official data from the California Workers’ Compensation Insurance Rating Bureau, benefits paid totaled $26 billion versus profits of $28.2 billion. One implication of such profitability is that insurance rates are too high, but another is that profits are high because of improper denials of service.

  Keep in mind what an insurance company is. Basically, it is just like a bank, with one crucial difference. Both banks and insurers take money from customers; these payments are called deposits at banks, premiums at insurers. The difference is in payouts. Banks return money on demand, insurers pay on event. And by arguing about the events, insurance companies can delay and deny claims, thus enhancing profits.

  What happened to Bob Manning was, in essence, a denial of payment. The same thing can happen to you, even if you work in an office that you imagine is a safe place. If you get hurt at work and your employer dodges its legal duty to pay, as in Manning’s case, you and your family will have your suffering compounded. Even if you avoid such terrible luck, others will not. As many as seven workers a day suffer permanent spinal injuries needing lifelong medical care, yet resistance to paying benefits appears to be increasing. When companies refuse to pay for the medical care they are legally required to provide, the costs get shifted to the taxpayers. That means the insurers’ profits are shielded and your taxes are diverted. By the time I met him, Bob Manning’s medical costs were in the millions of dollars.