The art market: Hands up for Hirst | The Economist

Damien Hirst's coup

The art market - Hands up for Hirst

How the bad boy of Brit-Art grew rich at the expense of his investors

Sep 9th 2010

IN 2008 just over $270m-worth of art by Damien Hirst was sold at auction, a world record for a living artist. By 2009 Mr Hirst’s annual auction sales had shrunk by 93%—to $19m—and the 2010 total is likely to be even lower. The collapse in the Hirst market can partly be ascribed to the recession. But more important are the lingering effects of a two-day auction of new work by Mr Hirst that Sotheby’s launched in London on September 15th 2008.

The sale was memorable for many reasons, not least its name, “Beautiful Inside My Head Forever”. The first session took place the very evening that Lehman Brothers went bankrupt. No one on Wall Street or in the City of London knew who might be next. Yet within the New Bond Street saleroom, collectors went on bidding, oblivious to the bloodletting without.

The sale was an innovative, daredevil affair. The art market is divided into “primary”, new work sold through galleries, and “secondary”, literally second-hand art, which is often put up for auction. This sale was full of primary material straight out of Mr Hirst’s studio, some of it not yet dry. (Usually the only new art sold at auction is donated by artists to raise money for charity.) According to Frank Dunphy, Mr Hirst’s business manager at the time, the galleries that represent him were very unhappy. Soon after breaking the news to Larry Gagosian, the world’s leading dealer, Mr Dunphy recalled their conversation: “Larry said, ‘It sounds like bad business to me. It’ll be confusing to collectors. Why do you need to do this? We could continue in the old way’.” Mr Dunphy went on: “We’ve had our shouting matches over the years. But there was no shouting that day.”

Sotheby’s was keen to build its own brand around a celebrity artist rather than the usual assortment of inanimate objects. The sale was marketed on YouTube and through the media around the world, part of a conscious effort to broaden international demand for the work. Sotheby’s filled its exhibition rooms with Hirsts. Never had so much of his art been seen in one place. Many art-world insiders saw the sale as an artistic event. Cheyenne Westphal (pictured above, right), European chairman of Sotheby’s contemporary art, says: “Damien’s auctions will become part of his oeuvre. He has done three sales: ‘Pharmacy’ (2004), the ‘RED’ charity auction (2008), and ‘Beautiful’. Fast forwarding, they will be very good provenance.”

Few people were convinced, though, that the market could absorb 223 lots from one artist in 24 hours. Yet an astonishing 97% of the works sold. “Beautiful” brought in £111m ($198m) and expanded the art market: 39% of the buyers had never bought contemporary art before and 24% of them were new to Sotheby’s. Europeans (including Russians) bought 74% of the lots, while 17.7% went to the Americas and 8.3% flew to Asia and the Middle East.

But who exactly bought what? Even Mr Hirst admits, “I’m still finding out.” Dealers acquired some works, but 81% of the buyers were private collectors purchasing directly. Miuccia Prada, an Italian designer and longstanding Hirst collector, for example, spent £6.3m acquiring a trio of Mr Hirst’s trademark animals in formaldehyde: “The Black Sheep with the Golden Horn”, “False Idol” (a calf), and “The Dream” (a foal made to look like a unicorn). “I think it was an incredible conceptual gesture, not a sale,” she says.

Several billionaires from the former Soviet Union also took part. Alexander Machkevitch, a Kazakh mining magnate with a taste for metallurgical themes, bought six lots in the evening sale: a large stainless steel cabinet filled with manufactured diamonds, a pair of gold-plated cabinets containing more lab gems, three butterfly canvasses and a spot painting with a gleaming gold background for a total of £11.7m. Other buyers from the region included Maria Baibakova, Vladislav Doronin, Victor Pinchuk and Gary Tatintsian.

Speculation abounds about who spent £10.3m (including commission) on “The Golden Calf”, a bull in formaldehyde with 18-carat gold hooves and horns. Many thought the garish top lot carried an ambitious estimate, £8m-12m, and would be hard to sell. In the event it proved a nervous moment—there were only two bidders—and whoever acquired it has not been showing it off. The persistent rumour is that the “Calf” has gone to the royal family of Qatar. (Just over a year earlier the emir’s daughter, Sheikha al-Mayassa al-Thani, bought Mr Hirst’s “Lullaby Spring”, a pill cabinet, for £9.65m, the highest price ever paid for a work by a living artist.) When asked about the Qataris, Mr Hirst replies, “I’m sure they did buy things. But it’s all hearsay. I got a call from somebody who said [the Qataris] bought ‘The Golden Calf’ but I think they’re denying it.”

Could any other artist pull off this kind of spectacular trade? Mr Hirst is often likened to Jeff Koons, an American pop artist who overtook Mr Hirst as the most expensive living artist when his “Hanging Heart” sold for $23.6m in November 2007 (see chart 1). Although Mr Koons has a larger-than-life persona and his work enjoys international appeal, he is a conservative market player who issues works in controlled editions of five and concentrates exclusively on the very high end. Nothing could be further from Mr Hirst’s risk-loving manner and his desire to offer work at a range of different prices. “Beautiful” was a success in part because it offered something for everyone.

Mr Hirst, already rich and famous, became richer and more famous. But what of his investors? Two years after the auction, the second-hand trade in Hirsts has slowed to a trickle. Even Sotheby’s, which has had a Hirst in every major contemporary sale in London since “Pharmacy” in 2004, offered none of his art in this year’s evening sale in June. The auction house admits it is avoiding Mr Hirst’s work because it can’t meet its consignors’ price expectations.

The average auction price for a Hirst work in 2008 was $831,000. So far in 2010 it is down to $136,000, a sum that does not even take into account the many lots that failed to find buyers. With prices down to 2002 levels, the artist’s work is outperforming the S&P 500, but is lagging well behind Artnet’s C50 contemporary art index, an industrial average of the 50 most traded post-war artists (see chart 2). The only Hirst pieces that are showing signs of recovery are butterfly paintings, particularly the wing-only works that evoke kaleidoscopes and stained-glass windows. Nine of the ten top trades since the “Beautiful” sale have been butterflies of some sort.

A seller’s disappointment, however, is a buyer’s opportunity. Alberto Mugrabi, a dealer and devoted supporter of most things Hirst, observed the “Beautiful” sale carefully, but bought little. By contrast, he admits to buying 40% of the Hirst paintings that have come up for sale at Sotheby’s and Christie’s in the past year. “I believe in the artist,” he says. The Mugrabi family owns some 110 Hirsts, including an installation that features 30 sheep, two doves, a shark and a splayed cow in formaldehyde. The Mugrabis offered $35m for the artist’s diamond skull, “For the Love of God”, but failed to secure the work that was marketed at $100m and has never sold. “The Mugrabis rarely buy directly from me,” says Mr Hirst. “We can never work out a deal because they want such fierce prices.”

The Mugrabis liken the tumble in Mr Hirst’s secondary prices to Andy Warhol’s in the early 1990s. “In the long term, the market will be more than fine. I couldn’t be more optimistic,” says Mr Mugrabi. Yet they have not invested in Mr Hirst’s latest line of Francis Bacon-inspired skull paintings, saying that they are “not visually continuous with the old work, which we find more beautiful and relevant.” Unlike most of the work, which is made by teams of other people, the artist actually paints these himself. Most of the reviews have been ruthless: “The Worst of Hirst” and “Hirst, Renaissance man, obviously not”.

Americans who did not make purchases at the “Beautiful” sale have recently shown more confidence, buying from Gagosian Gallery’s “End of an Era” show in New York earlier this year. The Broad Art Foundation acquired “Judgement Day”, a giant gold-plated cabinet containing lab diamonds. Millicent Wilner, a Gagosian director, affirms that all 15 new works in the exhibition sold for a total of over $30m.

At the Hong Kong art fair in May a special Hirst stand by his British dealer, White Cube Gallery, was swarming with young people having their photo taken in front of the works. Daniela Gareh, White Cube’s sales director, confirms that it sold to first-time Hirst buyers from Korea, Taiwan and mainland China. “The Chinese respond to branding and Damien is a master brander,” she says. Other Criteria, Mr Hirst’s print business, also did a solid trade at the fair. Photos of Mr Hirst’s most expensive unsold work went like hot cakes. The most popular item was a foot-high image of the artist’s diamond skull, an edition of 1,000, priced at £950.

In 2008 and 2009, Mr Hirst repeatedly made statements like “The first time you sell something is when it should cost the most” and “I’ve definitely had the goal to make the primary market more expensive.” The artist was frustrated by the speculators who were buying from his galleries then quickly reselling his work at auction. Moreover, the acquisition of a package of 12 of his own works from Charles Saatchi for £6m in 2003, far more than what Mr Saatchi had originally paid, may have led to an Oedipal determination to overthrow all the high-rolling dealers and collectors who thought they might lord it over the little artist.

The goal of making the primary works more expensive may benefit Mr Hirst’s personal income in the short-term, but it makes no sense from the perspective of his market. Part of the reason that art costs more than wallpaper is the expectation that it might appreciate in value. Flooding the market with new work is like debasing the coinage, a strategy used from Nero to the Weimar Republic with disastrous consequences. If Mr Hirst were managing a quoted company, he would be unable to enrich himself at the expense of his investors in quite the same way. But Mr Hirst is an artist and, in Western countries, artists are valued as rule-breaking rogues.

Two developments could help Mr Hirst’s secondary market. He has started compiling his catalogue raisonné, a complete list of all the works he has made, which will comfort those who suspect he has made hundreds more spot and spin paintings than he admits to. According to Francis Outred, Christie’s European head of contemporary art, “As with Warhol, this could bring reassuring clarity to the question of volume within each series.” Mr Hirst is also discussing with the Tate a retrospective show to coincide with the Olympic games in London in 2012.

Hirst sceptics point out that the only museum to hold a career survey of Mr Hirst's work was in Naples, Italy, in 2004. From October 28th a private New York gallery, L&M Arts, will show 18 of his earliest medicine cabinets. The changing shape and contents of these pieces are the most intriguing evolutionary thread in Mr Hirst’s work. Indeed, they foreshadow the artist’s drive to assemble objects into auction spectaculars.

Where will the Hirst market go from here? The ball is still in Mr Hirst’s court. “Beautiful Inside My Head Forever” may have been an historic moment in artist empowerment, but such performances risk destroying the delicate ecology of living artists’ markets. Mr Hirst should repair his relationship with his collectors and concentrate on his retrospective. Another “Beautiful” sale could be ugly.

Books and Arts

The art market: Hands up for Hirst | The Economist

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Shrinking Societies: The Other Population Crisis - BusinessWeek

Shrinking Societies: The Other Population Crisis

The earth's population is growing at an alarming rate, but in some countries the lack of growth is the biggest problem

By Venessa Wong

A Japanese woman's role in society is to give birth, and "all we can do is ask them to do their best per head," said Hakuo Yanagisawa, Japan's former health minister. His remark, as reported by Bloomberg in 2007, drew criticism for being sexist, but it touches on one of Japan's most pressing issues: its rapidly aging and shrinking population.
Japan is expected to see its population contract by one-fourth to 95.2 million by 2050, according to the Population Reference Bureau, a Washington-based research group, making it the fastest-shrinking country in the world.Former Eastern Bloc nations Ukraine and Georgia came in second and third, respectively, in a ranking of more than 200 countries by Businessweek.com based on the Population Reference Bureau's 2010 World Population Data Sheet.
These countries defy the global trend—but that doesn't mean they'll be spared problems of their own. The world population is expected to expand by 37 percent to 9.5 billion in 2050, according to the report, but growth will not be evenly distributed. Developing countries will grow the most, with the population in Africa expected to double.
Meanwhile, other regions will shrink as the boomer generation ages, people have fewer children, and workers leave for opportunities abroad. The most widespread decline is projected in Eastern Europe, where birthrates have declined since the breakup of the Soviet Union. The number of people in every country in the region, except the Czech Republic, is forecast to contract. By 2050 the region will have lost 13.6 percent of its population, according to data from the Population Reference Bureau.
"Europe, Korea, and Japan have gone into panic mode," says Carl Haub, a senior demographer at the Population Reference Bureau. A declining population impacts a country's economic growth, labor market, pensions, taxation, health care, and housing, according to the U.N. Globally by 2050, the number of older persons in the world will exceed the number of young for the first time in history, according to the U.N. The imbalance will create havoc in the pension systems and make it difficult to support retired and elderly persons, Haub says.
Despite these economic and social consequences, there have been no easy long-term solutions for countries trying to reverse this trend. "Demographic changes are pretty glacial," says Haub.

Incentivizing Growth

That does not mean governments are not trying. Many countries are on a mission to raise the number of births. Although migration patterns affect many countries—such as Lithuania, where the number of people leaving the country is several times the number entering it—they change quickly and can be difficult to project.
Japan's fertility rate fell from 1.57 children per woman in 1989 to 1.26 in 2005, according to Haub. It has rebounded to 1.4, but remains below the rate needed to replace the population: 2.
To encourage people to have more children, the government started implementing a series of programs called "Angel Plans" in 1994, says Toshiko Kaneda, senior research associate at the Population Reference Bureau. The plan offers counseling to couples, increases child-care services, and provides a monthly stipend of 26,000 yen (approximately $303) per child to ease the burden of raising a family.
In Germany, where the fertility rate is 1.3, the government pledged to increase the number of nursery schools and introduced an allowance that pays 67 percent of a parent's income for the first year after a child is born if he or she stays home.
Even in Iran, where the fertility rate is 1.8, President Mahmoud Ahmadinejad recently introduced a policy that pays families for every child born and deposits money into the child's bank account until he or she is 18.
Such policies only have moderate success, says Dimiter Philipov, a research group leader at the Vienna Institute of Demography in the Austrian Academy of Sciences. As subsidies mainly cause people to have children earlier, the number of births typically increases in the first few years after a policy is passed. The allowances are much lower than the amount needed to raise a child, but "this is a success because it brings in more babies and makes population changes smoother," he says.
Also, while declining fertility was once attributed to the falling marriage rate, today the deteriorating job environment also affects people's decisions to have children, according to NLI Research Institute in Japan. Thus, in developed countries, rather than offer financial incentives, Philipov says, it is more effective to relieve pressure on parents through child-care services and ensuring job security for mothers. "Some would say no one has done it better than France," where there is a broad menu of services for women and parents, says Haub.

Ideal Fertility Rate

Some argue the need to boost the fertility rate might not be so urgent. Tomáš Sobotka, a research scientist at the Vienna Institute of Demography, wrote in February in a column for The Guardian in the U.K. that demographers have been envisioning the demise of Europe since birthrates in the region began declining in the late 19th century, but "it is not population size but affluence and technology that make some countries more powerful than others."
Philipov says a debate has emerged about the ideal fertility rate. Advances in science and technology that boost productivity might compensate for a fertility rate below the replacement level, such as 1.7 to 1.8, he says.
Still, a fertility rate of 1.4 or 1.5, as seen in many countries, is "too low," Philipov says. At that level, the number of entries into the labor force becomes too narrow, making it difficult to support pensioners and children.

Elder Care

As fewer children are born, the fastest-growing age group in the world is people age 80 and older, according to the U.N. In 2000, there were about 4 people over age 85 for every 100 people ages 50 to 64; by 2050, it will rise to 11.
The situation is more dire in places such as Japan, where the Population Reference Bureau predicts there will only be one working-age person for every person over age 65 in 2050. Already, there are long waiting lists at nursing homes in Japan's cities. To meet demand, the government has been recruiting, testing, and training nurses from Indonesia and the Philippines.
Also, new technologies are being introduced in Japan to serve the elderly, although they are no substitute for people. For example, companies have reportedly been designing robot caretakers, devices for remote medical care, and cars that monitor brain activity to assist older drivers.
Over the next 40 years, the age pyramid will be upside down and technological advancements will only provide limited relief. While demographic trends are difficult to change, Haub says, "something will have to happen."
Click here to see the 25 countries with the fastest-shrinking populations.

Wong is a lifestyle and real estate reporter for Bloomberg Businessweek.

Shrinking Societies: The Other Population Crisis - BusinessWeek

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Lunch with the FT: Alan Greenspan

Lunch with the FT: Alan Greenspan

By Alan Beattie

Published: July 30 2010 17:12 | Last updated: July 30 2010 17:12

Escaping the latest of a string of steaming hot summer days, I duck gratefully into the cool interior of Tosca, an Italian restaurant in the lobbyist quarter of Washington DC. From the pavement it is not prepossessing, curtains entirely screening off the interior and presenting a blank face to the world. But the busy, clubby interior hums with power. Situated conveniently between Capitol Hill and the White House, and in the neighbourhood of some of Washington’s most powerful political consultancies, it has a reputation as a location for political deals and power-broking at the highest levels. It was here, legend has it, that Tom Daschle spent a five-hour dinner persuading Barack Obama to run for the US presidency. It is very DC.

Entering a second after me is Alan Greenspan, former chairman of the US Federal Reserve. For nearly two decades he was one of the most powerful people in Washington, and indeed the world, and for many he became a symbol of the global economy in the days before it all went wrong. Greenspan is welcomed at the desk with a smooth greeting of “Hello, Mr Chairman,” the restaurant adhering to the reflexive Washington habit of addressing people by the titles of their offices even years after they have left them.

We are ushered through the buzzy dining room to a relatively secluded table in the corner. The 84-year-old Greenspan, neatly and soberly dressed, speaks softly but rapidly. He chooses a Diet Coke, the default beverage of official Washington. Suppressing a mad urge to call for a large Scotch just to be different, I ask for sparkling water.

I remark on the fame of the restaurant and he looks amused. “My wife suggested it.” He is married to Andrea Mitchell, chief foreign affairs correspondent for NBC television, who by his account is outgoing and sociable and a good foil to his more reserved character. You get the impression that he is very happy to outsource a lot of such decisions to her. He asks if he can pay. I explain that part of the game is for the FT to pick up the bill. He grins. “So there is such a thing as a free lunch.”

It’s not a view you often hear from central bankers. But for much of Greenspan’s tenure at the Fed – he was chairman from just before the 1987 stock market crash until 2006 – it looked as if it were true. The economy grew, the stock market surged, house prices rose and Wall Street kept getting richer. Then, just a year after Greenspan handed over the Fed joystick to Ben Bernanke, a credit crunch began that turned into a global financial crisis, and the entire system of finance capitalism, of which Greenspan had been such a powerful advocate, threatened to eat itself.

Critics who long thought that Greenspan was too enthralled by free enterprise and financial markets have claimed vindication. Typically, he has been ruminating deeply about the implications of what has happened, and synthesising his thoughts into an argument. It is a long habit: before arriving at the Fed he spent three decades running an economic consulting firm in New York, interrupted by a stint as chairman of President Gerald Ford’s council of economic advisers. In preparation for our meeting he sends me a 46-page treatise he has written about the crisis.

. . .

“Do you want to get started?” he says. He means the interview, not lunch. Before we get round to ordering, we’ve gone through the near-impossibility of being able to predict the global financial crisis (which he illustrates by tracing a probability distribution in the air with his finger), the assumptions underlying financial regulation, the parallels with the financial panic of 1907 and the impact of the end of the cold war on global saving rates. I reported on the Federal Reserve early in the 2000s when Greenspan was chairman, and memories of long conversations with him in this professorial style are rapidly coming back to me. He does his research – at one point quoting from a story of mine that appeared in the FT the morning of our lunch – and marshals his arguments.

Though he professes not to speak in complete sentences – unlike his wife, he says, who can talk in perfect paragraphs on any occasion – and enjoins me to clean up the syntax of whatever I quote him saying, it turns out to be unnecessary. His manner is measured, precise and academic, though he makes his points forcefully, gripping the table as he argues. “Remember my premise,” he says, more than once, while going through a logical progression.

He has admitted to having been “30 per cent wrong” in his time as Fed chairman, particularly in assuming that banks and financial institutions would closely monitor the creditworthiness of the people with whom they were doing business. But his present plan for preventing a recurrence of the global financial crisis still shows a predilection for the light touch: make banks hold more capital to back their lending, demand higher collateral that can be seized if financial transactions go wrong, and keep more cash on hand in case of emergencies.

In extremis, he says, banks might have to be broken up by law if they become too big to fail without bringing down the whole financial system. But he makes clear that he regards such an intervention as a last resort. He retains faith in markets and doesn’t even think that US-style finance capitalism will lose ground to the softer, more regulated model of European social democracy, let alone the appeal of a centrally planned economy such as the former Soviet Union. It is a question of making precise technocratic adjustments.

I wonder whether this limited solution is a proportionate response to such an economic cataclysm. Many, including Paul Volcker, his predecessor at the Fed, have urged much tougher constraints on banks. “If you mean is it a proportionate emotional response to the people who have really lost a great deal through no fault of their own, the answer is no,” he says. But in terms of what needs to be done, the solutions can be narrowly focused: revise the likely probability of financial catastrophe in the light of new evidence and make banks behave accordingly. “A necessary condition for my position is that this is a very rare event,” he says. The implosion of the debt bubble that had built up, and the extent to which it almost caused the entire financial system to stop working, was not anticipated by financial regulators.

After 15 minutes we look to our menus. Eschewing elaborate formulations such as black ink tagliatelle with crabmeat ragu, Greenspan opts for a more ascetic dish: grilled swordfish with roasted organic vegetables. Mindful of the difficulties of conducting an interview while slurping pasta, I reluctantly pass up the carrot pappardelle with rabbit and also go for a simple dish: grilled baby octopus with a green salad. The food arrives swiftly and we start eating, Greenspan taking small forkfuls of swordfish dipped in Dijon mustard.

. . .

The other part of his record seized on by critics, especially Democrats, is his support for two rounds of tax cuts. One came in 2001 at the beginning of the administration of President George W Bush and one two years later. The week before we met, with an eye to the US’s huge fiscal deficit, he told an interviewer that he supported reversing those tax cuts, a remark seized on by his detractors to argue that he was irresponsible to have backed them in the first place. Here, too, he has a carefully worked-out response. One, both administration and congressional forecasts back then predicted huge fiscal surpluses, so a tax cut was quite sensible. Two, he argued at the time that a second round of cuts should be made conditional on how the economy and the public finances developed, which they were not. Three, he underestimated how his words would be seized on to justify reducing taxes willy-nilly, and he has already admitted that mistake in his 2007 memoirs, The Age of Turbulence. “Criticisms are wholly deserved when you’ve done something wrong, I grant you,” he says. “But I still prefer when I’m criticised that it be accurate.”

The plates are cleared and we move on to coffee. He orders a cappuccino, I an Americano. The formal business of the symposium having been concluded, I move on to more personal matters. When he was Fed chairman, he had dozens of the smartest economists in the world as a resource and endless conversations with brilliant colleagues and counterparts around the world. For him, personally, how much of a wrench was it to leave it all?

The answer, it turns out, is not a huge one. He does hanker for the regular free-form meetings he used to have with Fed officials, sitting round for hours and talking about whatever interested him that day. Rather wistfully, he says he also misses the regular breakfasts he had with Larry Summers, then in the Treasury under the Clinton administration and now President Barack Obama’s chief economic adviser. Many colleagues regard Summers as abrasive, but Greenspan sounds affectionate. “We had a wonderful time,” he says. “I know the guy has a lot of people thinking he’s a little rough sometimes, but he is smart. Larry is really smart.”

But aside from the odd vacation playing golf or tennis in Aspen or Jackson Hole, Wyoming, where he stays on a ranch owned by longstanding friend and former World Bank president James Wolfensohn, Greenspan has plenty of work to keep him busy. Before joining the Fed, he ran his own economic consultancy and developed a phenomenal knowledge of abstruse data series and statistics. Even when he was Fed chairman, he still spent at least half his day in personal study. Now, with his central banking career over, he has gone straight back to what he did before, running a research operation with a handful of employees. This time he is aided by the power of modern computing and video conferencing, technologies of which he speaks almost reverently.

“People think, ‘How can you go from being a leading figure in an international financial system back to your desk?’” he says. “My answer is, ‘I love it.’ I’m going back to my roots.” His work involves data-mining of the most precise kind.

He speaks excitedly of constructing a data series that will allow him to monitor the month-to-month profitability of US non-financial corporations. “That’s the type of thing I’ve been doing for generations,” he says, and the reference to time served is not hyperbole.

. . .

Recently, for another piece of research, Greenspan was searching for the definition of what constitutes an aircraft wing in the US. He looked out some work he himself had done in his twenties on the aircraft requirements for the Korean war, which was going on at the time. And, he says proudly, the research showed that his style of thinking was the same back then. “It’s the conceptualisation, the statistical detail, the syllogisms, the algebra”.

When he gets on the theme of statistics and research, Greenspan relaxes and becomes almost expansive. I get the sense that, though he loved the Fed job, a more private and introspective life fits his personality rather better. “I’m still introverted,” he says. “By psychology I’m more an aide than a policymaker.” During his short early career as a professional jazz musician, for example, he says: “I was a good sideman, as they call it, but I didn’t like to be a soloist.” Indeed, much though I try, I find it hard to envisage him playing clarinet in the smoky jazz clubs of his native New York in the 1940s. It’s easier to imagine him junking the jazz to go to college and become an economist.

And while he clearly does care about his legacy, there does seem some truth to his protestations that other people spend a lot more time concerning themselves about his record than he does. “I’m so obsessed doing what I’m doing, I don’t think I have time to worry about it,” he says. “Let others worry about it. I’m busy.”

As the restaurant empties, we move on to current events, talking at length about China and his faith that the market economy will prevail there, however weakened its appeal might look right now and however slowly economic reform might be progressing. He worries that the current leadership, Hu Jintao and Wen Jiabao, are less keen on liberalisation than their predecessors Jiang Zemin and Zhu Rongji. But he does not seriously fear the country going into reverse and heading back towards central planning. “When I go to China, I haven’t heard anybody argue in favour of Karl Marx’s Das Kapital and the conceptual framework that it is about in years.”

His approach to everything is the same. Look at the data; calculate the probabilities; make a dispassionate calibrated decision. Just before we leave, he bemoans the calls on “poor Obama” to be seen to be caring more about the oil spill in the Gulf of Mexico. “I complained when people were saying he’s not showing enough empathy,” he says. “I said, ‘That’s not what I want to see.’ I want to see cold, cool, deliberative action. Empathy is not going to solve this problem.”

I settle up and we pick our way back through the dining room, which at 2.30pm is almost deserted. Few people in this town have the time or inclination for leisurely lunches. I decline the polite offer of a ride. Alan Greenspan is driven off through the muggy afternoon, back to descend into the depths of his beloved data mines.

Alan Beattie is the FT’s international economy editor

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Tosca

Table 50, 1112 F St NW, Washington DC

Insalata mista $8.00

Grilled octopus $24.00

Grilled swordfish $24.00

Diet Coke $2.50

Bottle sparkling water $7.00

Americano coffee $3.50

Cappuccino $4.00

Total (including tax) $80.30

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Alan Greenspan: the pre-Fed years

By Victoria Maw

1926: Born March 6 in the Washington Heights area of New York, the only child of a stock market analyst father and music-loving mother. His parents divorce when he is five years old.

1935: His father Herbert publishes Recovery Ahead!, a book about President Roosevelt’s New Deal spending plans. Greenspan Sr’s inscription to his son hopes “that at your maturity you may look back and endeavour to interpret the reasoning behind these logical forecasts and begin a like work of your own.’’

1943: Graduates from George Washington High School, excelling in mathematics and music.

1944: An accomplished clarinet and saxophone player, he joins Henry Jerome’s travelling big band. Also keeps the band’s accounts.

1948: Graduates in economics from New York University. In his memoir The Age of Turbulence (2007), he recalls: “I preferred to focus on technical challenges and did not have a macro view.”

1950: Gains a Masters in economics from New York University. Begins postgraduate studies at Columbia but drops out and accepts job at National Industrial Conference Board.

1952: Marries Joan Mitchell but obtains annulment after 10 months. Mitchell had introduced him to the work of writer and philosopher Ayn Rand: “I was intellectually limited until I met her,” he later wrote.

1954: Partners bond trader William Townsend to become chairman and president of Townsend-Greenspan & Co, a consulting business that makes economic forecasts.

1967: Advises Richard Nixon before 1968 presidential election. Turns down permanent position in Nixon administration but, in his memoirs, describes Clinton and Nixon as “by far the smartest presidents I’ve worked with”.

1974: Works for President Gerald Ford as chairman of Council of Economic Advisers.

1976: Guests at his 50th birthday party include Estée Lauder, Brooke Astor, Oscar de la Renta and Henry Kissinger.

1987: Appointed by Ronald Reagan as Federal Reserve chairman. In 1996 he proposes to Andrea Mitchell, an NBC correspondent he had been seeing for 12 years. Delays honeymoon for two months because of work: “I studied my calendar and suggested adding a honeymoon to the tail-end of an international monetary conference in Switzerland.”

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The MasterLiving Blog

Rediscovering banking like it used to be

BANKING, THE OLD FASHIONED WAY...

Rediscovering banking like it used to be

By Andrew Bounds

Published: June 6 2009 01:20 | Last updated: June 6 2009 01:20

Every morning at 8.45, Mike Heenan, a trim 58-year-old in a pinstripe suit and sensible spectacles, says goodbye to his wife and sets out on the 15-minute walk to his office in the Market Square of Stafford, a town of 65,000 people in the English potteries.

There’s a decent chance that on his way he will run into one or two of his customers, many of whom he knows by sight, at least. But even if he doesn’t, evidence of his business’s long relationship with its home town is all around in the houses that line the quiet streets – houses often bought with the mortgages that Heenan and his predecessors have been carefully doling out to the people of Stafford (and latterly to those further afield) for 132 years.

When he reaches Market Square, Heenan enters the Stafford Railway Building Society and climbs the stairs to his office on the first floor for a meeting with senior managers. It’s not a grand room – Stafford Railway has only one branch and 17 staff – and it doubles as Heenan’s office at the accountancy firm Dean Statham, where he still has clients.

In an arrangement once typical of Britain’s former roll of 2,000-plus building societies but unique today, Dean Statham continues to provide the building society’s chief executive – or secretary, to give Heenan his more traditional title. It has done so since 1892 when George Dean, auditor of the London and North Western Railway company and founder of Dean Statham, became secretary of Stafford Railway Building Society. His son Walter took over the firm – and the society – in 1912 at the age of 21 and stayed put for the next 60 years, interrupting his work only to fight in the Great War.

Heenan is only the seventh secretary of Stafford Railway, and Walter Dean would not feel out of place if he stepped into his office today. Behind a desk topped with green leather, there is a sturdy safe. Papers on the desk include decisions on mortgage applications and the society’s latest asset position, though computer screens also track currency movements and the like. Framed photographs reveal Heenan’s other long-standing relationship with the people of Stafford – his role as a Conservative borough councillor for the past 33 years. There he is with John Major and other luminaries. A Toby jug commemorates his time as mayor of Stafford. On a filing cabinet sits a letter opener, a gift from Royal Bank of Scotland to mark the opening of its branch in the town. Next to it is a penny, found in the street outside and now encased in glass with a typed note: “This coin is believed to be very rare as it could possibly be the only penny to have slipped through Mike Heenan’s fingers.”

. . .

It is a mark of how far banking in Britain has changed – and how fast – that Heenan, who would once have appeared the quintessential English provincial bank manager, now seems a curious throwback to an age that has not just passed but been wilfully uprooted: consigned readily to history along with the steam trains that inspired the creation of Stafford Railway. Equally, it is only because change has been so rapacious that almost everything about the way the society operates seems odd and old-fashioned, although apt to inspire nostalgia.

Stafford Railway was founded in 1877, 24 years after the Halifax, by local townspeople, guided by civic leaders such as the mayor, the vicar and directors of the London and North Western Railway that had just opened. The aim was to help workers buy houses and develop the land along the new line. The society’s first mortgage built the Mechanics’ Institute, a training centre that later became Stafford College and still stands.

At Stafford Railway, staff answer the phones. Mortgage applications are approved personally by Heenan – who, by industry standards, earns a very modest £139,000 – or his deputy, Susan Whiting. Customers are sized up by experienced negotiators, not shoved through standard credit-scoring procedures. Stafford railway will not lend more than 75 per cent of a property’s value, or above 3.5 times income. The society offers only one residential mortgage product, with interest charged at its standard variable rate (currently 3.49 per cent, and 4.5 per cent for buy-to-let). The lack of choice could easily be put down to an over-cautious conservatism but it is a result of a sober assessment that the society could not offer the same value and customer service if it varied its products. Offering discounted or fixed rates to new borrowers penalises existing ones – and leaves little room for manoeuvre if base rates change fast as they have done recently. To avoid possible conflicts of interest, Stafford does not sell life assurance, travel insurance or repayment vehicles for interest-only mortgages. It has only had to repossess two homes in the past decade.

The squandered legacy

Stafford Railway was one of thousands of building societies founded in the Victorian era that helped finance the urbanisation of Britain. Now there are fewer than 50. The change can be traced back to deregulation of the mortgage market in 1986, as part of efforts to promote home ownership. Until then, mortgages were in effect rationed and the Building Societies Association in London would set and communicate the daily interest rate to lenders.

But beginning with Abbey National, many of the largest building societies converted themselves into banks or were swallowed up by them. Members became shareholders, cashing in their chips – or those of the generations of prudent savers and borrowers before them.

John Kay, the FT columnist, was a director of the Halifax, Britain’s biggest building society, in 1997 when it took the decision to convert itself into a bank. Last year, after the Halifax was rescued from collapse by Lloyds TSB, he unflinchingly examined his role in an episode that he said summed up the financial crisis.

“I once gave away more money than Andrew Carnegie or Bill Gates. I authorised the distribution of almost £20bn to its [Halifax’s] 8 million members on flotation of the business.”

The clash of cultures between the stable, even staid, world of traditional mortgage lending and the risk-taking culture of wholesale banking brought the Halifax down, he wrote.

“Accepting deposits and underwriting and administering mortgages requires that millions of records should be maintained and updated every day with almost no errors. This activity does not require flair or imagination but does require conscientious individuals with integrity and loyalty. The Halifax was a precision machine that made the most of the talents of ordinary people. I came to understand the fundamental incompatibility of the cultures of retail and investment banking and why the marriage of the two so often leads to tears.”

He concluded: “Those conscientious people who process deposits and issue mortgages are still there, though many have had the worst weekend of their lives. The business they do continues to make money. Customers mostly remain loyal. The pursuit of shareholder value damaged both shareholder value and the business. We let them all down.”

To read John Kay’s original column in full, go towww.ft.com/squanderedlegacy

Stafford currently has outstanding mortgage loans worth £130m to 1,750 borrowers and deposits from more than 14,000 savers totalling £160m – so it lends out a bit less than it takes in, an extremely prudent way of doing things. And although it is small, its traditional approach has helped it to win numerous awards including What Mortgage magazine’s Best Overall Lender and Best National Building Society for the past five years. After the FT first reported on Stafford last autumn, others took an interest. The Daily Mirror dubbed it the “safest bank in Britain” while the News of the World and Sunday Express wrote glowingly about its approach to saving and lending.

Of course, the contrast with the rest of Britain’s high street banks (several outposts of which Heenan can see from his office window) is now all too obvious. By the time panicking customers were queuing up outside branches of Northern Rock to withdraw their savings, the former building society had outstanding mortgages and loans worth £100bn and deposits of only £24bn, the gap bridged by short-term borrowing in the wholesale money markets. These, of course, dried up suddenly and totally, forcing the government to come to the Rock’s rescue with £26.9bn of public money.

Or consider the Halifax, which relinquished its mutual status in 1997 (see box), merging four years later with Bank of Scotland to create an even more gigantic institution that was ultimately run by a former retail executive with little experience in banking. It finally had to be rescued via a takeover by Lloyds TSB that left Lloyds all but crippled. This was a world in which staff were handed sales targets that in effect forced them always to say yes – to offer loans and other products to customers who could ill afford them; to regard credit card borrowers who didn’t settle their balances as good customers whose limits would be raised so that the card companies could reap more in arrears and interest charges.

The Stafford seems to attract refugees from exactly this type of bank. Mike Smith, who recently joined the board as a non-executive director, was a local branch manager for a high street bank but became disillusioned and left to become a regional manager for Handelsbanken, the Swedish bank. In his new job, he says, managers have more discretion over lending. Previously, “it was just about pushing products. Bonuses were tied to targets and there was no room for discretion. The rhetoric is all about customer service. That’s fine, but your ability to deliver it and do due diligence is diminished in a chase for growth. A monkey could have taken the lending decisions.”

. . .

Belying his appearance, Mike Heenan has a taste for the spotlight. On stage at the Malcolm Edwards Theatre for the Stafford Railway Building Society’s 131st annual general meeting, Heenan is in his element. Once his deputy has run through the results for the year (a pre-tax profit of £1.05m) there is only one question from the floor. Could the board confirm how much money they had invested with the US fraudster Bernard Madoff and how much with Icelandic banks? “None whatsoever,” comes the reply. A ripple of laughter runs round the room.

Heenan then rises to give his “state of the nation report” and it is immediately clear that this is what the 63 building society members and assorted business contacts have come to hear. His hands thrust in his pockets, the spotlight falls upon him. He begins by recalling last year’s address, when he warned about bankers trading in complicated derivative products that they did not understand. He castigates the greed, the bonus culture and the “too clever by half” financial engineering of many banks. His audience, wearied by months of worry and indignation over the banking collapse, laps it up.

“A simple business model, whereby funds are generally lent on the basis of funds received, where profit is generated to maintain financial stability and not for personal gain, and where you only lend people money that they can afford to repay – not just based on their current circumstances but allowing some margin for the unforeseen – is the model that works,” he intones.

“Many of us of my generation will remember their first bank manager. It was one of those things you always remembered, like your first car and perhaps your first love. But at that time the bank manager was a fearsome character who often seemed intent on stopping you doing what you wanted rather than trying to sell you the latest loan along with every bolt-on product he could find. My first bank manager was A. Nutter” – a pause for laughter – “from the Midland Bank. He told me I couldn’t have the car loan that I wanted; I would have to trim back a bit. It was good advice. Bankers have to learn to say No again.”

He quotes a leader from The Times on the stampede by building societies to shed their mutual status, driven by depositors greedy for windfalls and investment bankers hungry for fees. “Those expressing doubts were ridiculed as steam train enthusiasts, hopeless romantics trying to save a business model that had no place in electrified modern capitalism.”

And there he stands, behind him the logo of Stafford Railway Building Society: a steam train.

. . .

Lately, mutual ownership has regained some of the intellectual currency it lost during the go-go years, when lending was let rip and cheap access to the wholesale money markets made cautious reliance on deposits from savers look like a ruinously uncommercial way to run a bank. Ministers have been heard thinking out loud about the perceived virtues of mutual ownership: conservative financing, a culture of responsibility, good customer service and so on.

Building societies, however, have not dodged every bullet to hit the banking industry. In March, Dunfermline Building Society had to be rescued after it got into trouble. Its demise, say its critics, was down to a badly timed push to ramp up its commercial property lending, using funds from the wholesale money markets that shortly afterwards dried up. Being mutual is no barrier to taking poor business decisions. Nor does it enable one to avoid paying for the mistakes of others – Stafford is not the only small building society to have seen its profits dented by having to pay larger sums into the Financial Services Compensation Scheme, which bails out customers when banks collapse.

Heenan is under no illusion that Stafford Railway provides a blueprint for the banking industry. “We do not deviate from what is prudent. I don’t think we’re a model for every building society. It is perfectly reasonable to want a fixed rate [mortgage], for example. You need some degree of sophistication in the market. We are not terribly good for first-time buyers because we don’t lend more than 75 per cent of the value. But I don’t think our model is bad.” Tellingly, he would not have secured a mortgage from the organisation he now heads when he arrived in Stafford in the 1970s. It would have judged the young accountant too risky a proposition. “I borrowed more than they would have lent me,” cheerfully admits Heenan, who still lives in the home he bought back then with the loan he obtained from a less risk-averse lender.

Some elements of the way Stafford Railway manages its affairs are, however, coming back into fashion, most obviously the greater reliance on deposits by savers to fund banks’ lending, though that of course means they cannot lend as extensively as they did before. The personal touch, too, is on people’s minds. “Everyone is talking about customer service,” says Hugh Fasken, editor of Retail Banker International. “The likes of HSBC and Barclays could not follow Stafford Railway – costs would go through the roof – but branch banking is back. They want a presence on the high street with good staff.”

The question of what it costs to run a bank as Heenan does cuts both ways, however, as we now know. Stafford Railway specialises in what Frank Partnoy, professor of law and finance at the University of San Diego, calls soft information – “knowing the customer, their relationships, the local area. Traders were looking at models not individuals. Perhaps assessing and pricing risk is better done by humans than by markets.” Yes, doing it this way costs more, he acknowledges, but it could still work out less than the trillions so far spent on cleaning up the current crisis.

Nonetheless, Partnoy has reservations. “The question is whether we would pay [the extra costs] without having the damage first,” he says. “I’m sceptical. I think we will always have these cycles of mania.”

. . .

You are unlikely to feel yourself sucked into a cycle of mania at the dinner for members and contacts that follows Stafford Railway’s annual general meeting. Heenan’s PR people always lay on some entertainment for the guests. Last year they hired a magician. The pièce de résistance, though, came at the end of the meal when one guest at each table rose to join the waiters in song, all of them revealing themselves to be professional opera singers.

This time a harpist plays as guests arrive and the post-prandial entertainment comes from the Barbara Walton Singers, who run through a collection of Gilbert and Sullivan-type English standards before their show reaches its climax, in which they perform the blurb from the building society’s website as if it were a psalm. Somewhat surprisingly, it’s a gag that works. Heenan is not the only one beaming.

Last to speak at the dinner, as the clock ticks towards midnight, is John Goodfellow, the then chairman of the Building Societies Association. A diminutive Scot, Goodfellow extols the strength of the mutual model, which, he points out, has withstood numerous recessions. “It is your society and don’t let anybody take it away from you,” he growls at the end to raucous cheers. After he sits down, Heenan flits from table to table, buying drinks, chatting with his members, checking everyone is happy.

Andrew Bounds is the FT’s north of England correspondent

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Leopoldo Abadia en Buenafuente

Muy Bueno

Hedge Fund Manager: Goodbye ...

Out in style...

Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst
into the spotlight last year (http://search.ft.com/ftArticle?queryText=lahde&aje=true&id=080115000297&ct=0 ) after his one-year-old fund returned 866
percent betting against the subprime collapse.


Last month, he did the unthinkable -- he shut things down, claiming dealing
with his bank

counterparties had become too risky. Today, Lahde passed along his "goodbye"
letter, a rollicking missive on everything from greed to economic
philosophy. Enjoy:



Today I write not to gloat. Given the pain that nearly everyone is
experiencing, that would be entirely inappropriate. Nor am I writing to make
further predictions, as most of my forecasts in previous letters have
unfolded or are in the process of unfolding. Instead, I am writing to say
goodbye.



Recently, on the front page of Section C of the Wall Street Journal, a hedge
fund manager who was also closing up shop (a $300 million fund), was quoted
as saying, "What I have learned about the hedge fund business is that I hate
it." I could not agree more with that statement. I was in this game for the
money. The low hanging fruit, i.e. idiots whose parents paid for prep
school, Yale, and then the Harvard MBA, was there for the taking. These
people who were (often) truly not worthy of the education they received (or
supposedly received) rose to the top of companies such as AIG, Bear Stearns
and Lehman Brothers and all levels of our government. All of this behavior
supporting the Aristocracy, only ended up making it easier for me to find
people stupid enough to take the other side of my trades. God bless America.



There are far too many people for me to sincerely thank for my success.
However, I do not want to sound like a Hollywood actor accepting an award.
The money was reward enough. Furthermore, the endless list those deserving
thanks know who they are.





I will no longer manage money for other people or institutions. I have
enough of my own wealth to manage. Some people, who think they have arrived
at a reasonable estimate of my net worth, might be surprised that I would
call it quits with such a small war chest. That is fine; I am content with
my rewards. Moreover, I will let others try to amass nine, ten or eleven
figure net worths. Meanwhile, their lives suck. Appointments back to back,
booked solid for the next three months, they look forward to their two week
vacation in January during which they will likely be glued to their
Blackberries or other such devices. What is the point? They will all be
forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry
Ellison will all be forgotten. I do not understand the legacy thing. Nearly
everyone will be forgotten. Give up on leaving your mark. Throw the
Blackberry away and enjoy life.



So this is it. With all due respect, I am dropping out. Please do not expect
any type of reply to emails or voicemails within normal time frames or at
all. Andy Springer and his company will be handling the dissolution of the
fund. And don't worry about my employees, they were always employed by Mr.
Springer's company and only one (who has been well-rewarded) will lose his
job.



I have no interest in any deals in which anyone would like me to
participate. I truly do not have a strong opinion about any market right
now, other than to say that things will continue to get worse for some time,
probably years. I am content sitting on the sidelines and waiting. After
all, sitting and waiting is how we made money from the subprime debacle. I
now have time to repair my health, which was destroyed by the stress I
layered onto myself over the past two years, as well as my entire life --
where I had to compete for spaces in universities and graduate schools, jobs
and assets under management -- with those who had all the advantages (rich
parents) that I did not. May meritocracy be part of a new form of
government, which needs to be established.





On the issue of the U.S. Government, I would like to make a modest proposal.
First, I point out the obvious flaws, whereby legislation was repeatedly
brought forth to Congress over the past eight years, which would have
reigned in the predatory lending practices of now mostly defunct
institutions. These institutions regularly filled the coffers of both
parties in return for voting down all of this legislation designed to
protect the common citizen. This is an outrage, yet no one seems to know or
care about it. Since Thomas Jefferson and Adam Smith passed, I would argue
that there has been a dearth of worthy philosophers in this country, at
least ones focused on improving government.



Capitalism worked for two hundred years, but times change, and systems
become corrupt. George Soros, a man of staggering wealth, has stated that he
would like to be remembered as a philosopher. My suggestion is that this
great man start and sponsor a forum for great minds to come together to
create a new system of government that truly represents the common man's
interest, while at the same time creating rewards great enough to attract
the best and brightest minds to serve in government roles without having to
rely on corruption to further their interests or lifestyles. This forum
could be similar to the one used to create the operating system, Linux,
which competes with Microsoft's near monopoly. I believe there is an answer,
but for now the system is clearly broken.





Lastly, while I still have an audience, I would like to bring attention to
an alternative food and energy source. You won't see it included in BP's,
"Feel good. We are working on sustainable solutions," television
commercials, nor is it mentioned in ADM's similar commercials. But hemp has
been used for at least 5,000 years for cloth and food, as well as just about
everything that is produced from petroleum products. Hemp is not marijuana
and vice versa. Hemp is the male plant and it grows like a weed, hence the
slang term. The original American flag was made of hemp fiber and our
Constitution was printed on paper made of hemp. It was used as recently as
World War II by the U.S. Government, and then promptly made illegal after
the war was won. At a time when rhetoric is flying about becoming more
self-sufficient in terms of energy, why is it illegal to grow this plant in
this country?



Ah, the female. The evil female plant -- marijuana. It gets you high, it
makes you laugh, it does not produce a hangover. Unlike alcohol, it does not
result in bar fights or wife beating. So, why is this innocuous plant
illegal? Is it a gateway drug? No, that would be alcohol, which is so
heavily advertised in this country. My only conclusion as to why it is
illegal, is that Corporate America, which owns Congress, would rather sell
you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a
plant in your home without some of the profits going into their coffers.
This policy is ludicrous. It has surely contributed to our dependency on
foreign energy sources. Our policies have other countries literally laughing
at our stupidity, most notably Canada, as well as several European nations
(both Eastern and Western). You would not know this by paying attention to
U.S. media sources though, as they tend not to elaborate on who is laughing
at the United States this week. Please people, let's stop the rhetoric and
start thinking about how we can truly become self-sufficient.



With that I say good-bye and good luck.



All the best,



Andrew Lahde

The Master Blog: U.S.: Fannie Mae, Freddie Mac To Buy $40 Billion Per Month In Troubled Loans

The Master Blog: U.S.: Fannie Mae, Freddie Mac To Buy $40 Billion Per Month In Troubled Loans

The Perfect Business

Yes, you must be thinking, I thought this blog was about living, not working... You are right; however, to live well, you must have a good work life, since we do spend most of our time at work.

In this sense, here is a piece by Richard Russell of Dow Theory Letters on the perfect business.

This piece is by Richard Russell of Dow Theory Letters.

It's excellent, nothing to add!

The Perfect Business

AH PERFECTION: Strange, but the most popular, the most widely-requested, and the most widely quoted piece I've ever written was not about the stock market -- it was about business, and specifically about what I call the theoretical "ideal business." I first published this piece in the early-1970s. I repeated it in Letter 881 and then again in Letter 982. I've added a few thoughts in each successive edition. But seldom does a month go by when I don't get requests from subscribers or from some publication or corporation to republish "the ideal business." So here it is again -- with a few added comments.

I once asked a friend, a prominent New York corporate lawyer, "Dave, in all your years of experience, what was the single best business you've ever come across?" Without hesitation, Dave answered, "I have a client whose sole business is manufacturing a chemical that is critical in making synthetic rubber. This chemical is used in very small quantities in rubber manufacturing, but it is absolutely essential and can be used in only super-refined form.

"My client is the only one who manufactures this chemical. He therefore owns a virtual monopoly since this chemical is extremely difficult to manufacture and not enough of it is used to warrant another company competing with him. Furthermore, since the rubber companies need only small quantities of this chemical, they don't particularly care what they pay for it -- as long as it meets their very demanding specifications. My client is a millionaire many times over, and his business is the best I've ever come across." I was fascinated by the lawyer's story, and I never forgot it.

When I was a young man and just out of college my father gave me a few words of advice. Dad had loads of experience; he had been in the paper manufacturing business; he had been assistant to Mr. Sam Bloomingdale (of Bloomingdale's Department store); he had been in construction (he was a civil engineer); and he was also an expert in real estate management.

Here's what my dad told me: "Richard, stay out of the retail business. The hours are too long, and you're dealing with every darn variable under the sun. Stay out of real estate; when hard times arrive real estate comes to a dead stop and then it collapses. Furthermore, real estate is illiquid. When the collapse comes, you can't unload. Get into manufacturing; make something people can use. And make something that you can sell to the world. But Richard, my boy, if you're really serious about making money, get into the money business. It's clean, you can use your brains, you can get rid of your inventory and your mistakes in 30 seconds, and your product, money, never goes out of fashion."

So much for my father's wisdom (which was obviously tainted by the Great Depression). But Dad was a very wise man. For my own part, I've been in a number of businesses -- from textile designing to advertising to book publishing to owning a night club to the investment advisory business.

It's said that every business needs (1) a dreamer, (2) a businessman, and (3) a S.O.B. Well, I don't know about number 3, but most successful businesses do have a number 3 or all too often they seem to have a combined number 2 and number 3.

Bill Gates is known as "America's richest man." Bully for Billy. But do you know what Gates' biggest coup was? When Gates was dealing with IBM, Big Blue needed an operating system for their computer. Gates didn't have one, but he knew where to find one. A little outfit in Seattle had one. Gates bought the system for a mere $50,000 and presented it to IBM. That was the beginning of Microsoft's rise to power. Lesson: It's not enough to have the product, you have to know and understand your market. Gates didn't have the product, but he knew the market -- and he knew where to acquire the product.

Apple had by far the best product in the Mac. But Apple made a monumental mistake. They refused to license ALL PC manufacturers to use the Mac operating system. If they had, Apple today could be Microsoft, and Gates would still be trying to come out with something useful (the fact is Microsoft has been a follower and a great marketer, not an innovator). "Find a need and fill it," runs the old adage. Maybe today they should change that to, "Dream up a need and fill it." That's what has happened in the world of computers. And it will happen again and again.

All right, let's return to that wonderful world of perfection. I spent a lot of time and thought in working up the criteria for what I've termed the IDEAL BUSINESS. Now obviously, the ideal business doesn't exist and probably never will. But if you're about to start a business or join someone else's business or if you want to buy a business, the following list may help you. The more of these criteria that you can apply to your new business or new job, the better off you'll be.

(1) The ideal business sells the world, rather than a single neighborhood or even a single city or state. In other words, it has an unlimited global market (and today this is more important than ever, since world markets have now opened up to an extent unparalleled in my lifetime). By the way, how many times have you seen a retail store that has been doing well for years -- then another bigger and better retail store moves nearby, and it's kaput for the first store.

(2) The ideal business offers a product which enjoys an "inelastic" demand. Inelastic refers to a product that people need or desire -- almost regardless of price.

(3) The ideal business sells a product which cannot be easily substituted or copied. This means that the product is an original or at least it's something that can be copyrighted or patented.

(4) The ideal business has minimal labor requirements (the fewer personnel, the better). Today's example of this is the much-talked about "virtual corporation." The virtual corporation may consist of an office with three executives, where literally all manufacturing and services are farmed out to other companies.

(5) The ideal business enjoys low overhead. It does not need an expensive location; it does not need large amounts of electricity, advertising, legal advice, high-priced employees, large inventory, etc.

(6) The ideal business does not require big cash outlays or major investments in equipment. In other words, it does not tie up your capital (incidentally, one of the major reasons for new-business failure is under-capitalization).

(7) The ideal business enjoys cash billings. In other words, it does not tie up your capital with lengthy or complex credit terms.

(8) The ideal business is relatively free of all kinds of government and industry regulations and strictures (and if you're now in your own business, you most definitely know what I mean with this one).

(9) The ideal business is portable or easily moveable. This means that you can take your business (and yourself) anywhere you want -- Nevada, Florida, Texas, Washington, S. Dakota (none have state income taxes) or hey, maybe even Monte Carlo or Switzerland or the south of France.

(10) Here's a crucial one that's often overlooked; the ideal business satisfies your intellectual (and often emotional) needs. There's nothing like being fascinated with what you're doing. When that happens, you're not working, you're having fun.

(11) The ideal business leaves you with free time. In other words, it doesn't require your labor and attention 12, 16 or 18 hours a day (my lawyer wife, who leaves the house at 6:30 AM and comes home at 6:30 PM and often later, has been well aware of this one).

(12) Super-important: the ideal business is one in which your income is not limited by your personal output (lawyers and doctors have this problem). No, in the ideal business you can sell 10,000 customers as easily as you sell one (publishing is an example).

That's it. If you use this list it may help you cut through a lot of nonsense and hypocrisy and wishes and dreams regarding what you are looking for in life and in your work. None of us own or work at the ideal business. But it's helpful knowing what we're looking for and dealing with. As a buddy of mine once put it, "I can't lay an egg and I can't cook, but I know what a great omelet looks like and tastes like."