pat regnier

2015-07-10T19:18:00.000-07:00

Welcome to my personal website. I'm an assistant managing editor at Money magazine, where I first began working as reporter in 1997. In addition to my editing, I wrote a monthly column for a couple of years and still contribute the occasional feature to Money and other Time Inc. publications. On this page, you'll find links to those stories.

From 2001 through most of 2002, I was a senior writer covering business and economics from London for the European edition of Time. Prior to becoming a journalist, I was an analyst at Morningstar, the mutual-funds research service in Chicago. I grew up in that neck of the woods, in Aurora, and went to college downstate at Illinois. I think of myself as an incurable, bred-in-the-bone Midwesterner. Naturally, I live in Brooklyn.

In Money magazine

2009-09-27T09:37:00.000-07:00

Welcome to Zombieland
The truth about health care reform
What drives portfolio managers
Affordable heath care: A right, or a product? online
The trouble with public colleges
The coming long-term care crisis (and why personal finance can't solve every problem) online
Is it all over for stocks?
What you're really voting for
California screaming: Tales from the housing bust
The plan to save early retirement Q&A
Why you can't believe predictions
Rx America: What's the prescription for U.S. health-care reform?
Is it time for a new New Deal?
Facing up to the costs of long-term care
Is your life too risky? Q&A
Can you live long and prosper?
Why you'll grow rich...very slowly
This man wants to dominate the radio airwaves. He wants to be a best-selling author. He wants to destroy the IRS.
The ID theft protection racket
Myths of American healthcare
The trouble with shareholders
Can we fix the 401(k)? co-written with Joan Caplin
One Bad Day co-written with Adrienne Carter
Heroes and losers
How powerful is compound interest?
Hubert the great co-written with Amy Feldman
How high is up?
Fund wars co-written with Jason Zweig
Don Yacktman's lonely crusade

"The Bottom Line" columns in Money

2009-05-13T08:09:00.000-07:00

Putting your money where your heart is
The wrong way to pick funds
The Internet ruined my life
Expect higher health care costs in 2010
Get Ivy League smarts - free
Focus on the real health care risks
Twentysomething 2.0
The case for a nonpartisan portfolio
Why a good education is harder to come by
Investing lessons we've learned
Coming soon: Higher taxes, bigger government
How we're going to save more
Why saving for your future is so hard
3 tax breaks we love (but can't afford)
Boomers won't bust us - Health care will
Let's make America thrifty again
Putting a price tag on your polluting
Why you just can't seem to save enough
Waiting for a subprime perp walk
Meet my future widow
The health-care debate you ought to hear

In Fortune magazine

2009-01-12T22:20:00.000-08:00

Galbraith on the crash... it has a familiar ring
Can you to outsmart the market?

In Time magazine, Europe edition

1991-09-11T13:39:00.000-07:00

Soaking in 'the spirit of Davos online
Europe's new raiders
Middle aged Virgin
It ain't heavy... It's my debt
Reality bites book review
Out with the old and in with the euro
Listening to money talk Q&A
What the French know about globalization (a lot more than they're letting on)
Over here ...
Borrow for Britain
Tempest in a tea cup exhibition review

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Middle-aged Virgin

1990-09-16T10:49:00.000-07:00

March 5, 2001
Time Atlantic

With reporting by Helen Gibson/London

LONDON-- Last month, executives of Richard Branson's Virgin companies rode a dingy and slightly delayed rail car--not, as it happened, one of Sir Richard's--up to England's East Midlands to unveil the first of a new line of super-fast tilting trains. The jet-shaped thing only crawled along a test track, but it would have been a beautiful sight for any boy who loves trains. Or a grown man, for that matter. Virgin group director Will Whitehorn sprang up to one of the coaches and pressed his face to the shiny aluminum skin. He later told Branson: "You're going to wet yourself when you see it." If Britain's dodgy railroad tracks were only up to the task, the train could hit 225 km/h. Even as it is, it should cut the trip between London and Manchester to two hours, down from two hours and 40 minutes, when it joins the fleet in 2002, Whitehorn says. But the train has one other, perhaps more urgent, mission: to take some of the tarnish off the aging Virgin brand.
The past year has been rocky for Branson, 50, who still holds the undisputed title of Britain's most absolutely fabulous tycoon. "The entrepreneur in a sweater," as the Guardian newspaper recently dubbed him, owns stakes in hundreds of businesses--from the banal, like Virgin Cosmetics, to the notional, like the spacebound Virgin Galactic Airways--so it's never easy to say if he's up or down. Last March, Branson sold 49% of his Virgin Atlantic airline to Singapore Airlines for a nice $900 million. But his Virgin Trains--about 17% of Virgin revenue--are still notoriously late and slow. Much-hyped experiments like Virgin Cola--remember the curvaceous Pammy bottle?--have quietly gone flat. And now Branson's People's Lottery is locked in an ugly fight over the charity-driven British lottery franchise. For a business built less on a particular product line than on its glamorous, do-right image, this ought to be worrying stuff.
Unless you are Branson. "Having just done massive research on the brand, [Virgin Trains] doesn't seem to have done the sort of damage to the brand you might have thought," says Branson, sitting on a sofa in a surprisingly modest office tucked away in London's Notting Hill Gate neighborhood. Branson, others have noted, can seem shy for a guy equally smiley alongside bare-chested models and Tony Blair. But "shy" doesn't quite capture it; imagine Bill Gates in court, except handsome and well turned-out. Branson crosses his arms as if to hug himself and talks to his shoes.
"We took over the most dilapidated network in the United Kingdom," he says of the railway lines Virgin got from the old British Rail in 1997. "It hadn't had any investment in 30 years. Trains were falling apart." Virgin introduced airline-style pricing, so that the cost of business class and peak standard-fare tickets went up while pre-booked tickets got cheaper. (A testament to the power of brand: the government forced Virgin to paint its name on the trains as a condition of the sale.) Meanwhile, Virgin's two long-distance lines have ranked near the bottom in reliability among high speed lines, according to the Strategic Rail Authority. Virgin group commercial director Richard Bowker observes that in the months before last October's Hatfield rail disaster--which killed four passengers on a non-Virgin train, and led to national speed restrictions--the company's performance was gaining on the competition. Branson believes that as long as consumers can see the investments Virgin is making to improve services down the line, they'll forgive a lot.
A little old-fashioned ballyhoo might help as well. Last month, in response to the steep decline in ridership after Hatfield, Branson announced "The World's Biggest Rail Offer," slicing ticket prices in half. Trouble is, all that demand led to a customer service "meltdown"--Branson's word--and Britain's newspapers were quick to report "chaos" in the rail system. "When Harrods has a sale on and there's a line outside, you don't hear anyone whingeing," says Bowker.
Time was when Branson could do no wrong in the eyes of U.K. opinion makers; now that he has been knighted it sometimes seems he can do no right. Virgin's reams of cheerful consumer research notwithstanding, Branson came in third on BBC radio's lighthearted year-end Villain of the Year poll. And in December an unauthorized biography by journalist Tom Bower--which seems to try the fancy trick of painting Branson as both a Machiavellian schemer and a reckless fool--ranked alongside Branson's own autobiography on the Sunday Times business best-seller list. (Branson has sued Bower for libel over a newspaper article.)
All of this proves only that managing a big brand into respectable middle age isn't easy. Consider that Branson is thinking about asking for up to $43 million from the government to cover the cost of maintaining his doomed bid to wrest the lottery franchise away from its current operator Camelot. All this for a business--not associated with any Virgin company--that was designed to give its profits to charity. Sir Richard says money can come from the Treasury, which taxes the lottery. But Norman Baker, the Liberal Democrats' spokesman on the lottery, warns that it would likely come out of the lottery's own "good causes" fund.
"If it comes out the good causes fund, we'll give it straight back to charity," says Branson. "This is just to deter us from getting our costs back." Branson--who doesn't think the public associates Virgin with his lottery fight--says it's a matter of principle. He actually came within a whisker of getting the business last year and believes he was misled into spending more money to maintain a bid he should have won on the merits. So why did Branson lose the lottery? "It's rather awkward for me to say why," says Branson, coyly. "Ring the editor of the Sun and ask him why he thinks I didn't win the lottery."
"Because basically he didn't deserve to get it," says David Yelland, editor of the aforementioned tabloid. Although the Branson bid promised to improve the games and deliver more money to charity, the commission questioned whether Branson really had the stuff to make sure it all came off. Yelland suspects that with Westminster still reeling from the Millennium Dome mess, the risk was just too great. "You can bugger up the Dome and win the election," he says. "You bugger up the lottery, and you're really in trouble."
The fact is, although some of the best-known Branson businesses are in the black--the main airline, trains, Virgin Direct financial services and the Megastores all turn profits, says Whitehorn--plenty more just plain haven't worked. Virgin Drinks, the cola company, lost millions in recent years. Virgin Express, a Brussels-based discount airline that trades on the NASDAQ for about $1 a share, down from more than $27 in 1998, has been hit by its dependence on connections with Belgium's beleaguered Sabena airline.
About a year ago Branson even had to fight off bankers who wanted to close his Our Price high street shops, which are being retooled into mobile phone and CD stores. Bower's book suggests that Branson had to sell his Virgin Atlantic stake to pay his debts and save Our Price. Branson counters: "We could have kept it afloat through the general funds of Virgin."
All of this makes some wonder if Branson does too much. In fact, Whitehorn told TIME that Virgin is going to stop launching lines in order to expand its current businesses into new markets. But the vital point is that like any brand, the Virgin label is part illusion. (Did Coke ever really teach the world to sing? Is Virgin Cola anything but another kind of bubbly brown-sugar water packed into bright red cans?) Branson says he's the business world's equivalent of Ralph Nader. His Virgin Atlantic really did innovate business-class air travel and as Virgin Blue airline breaks into the sheltered domestic Australian market, perhaps it will fight for consumers against established interests. But what about when Virgin Direct sells a simple index-tracking investment fund for almost twice the annual fee of other firms' similar funds?
Bowker reckons that if Branson's stakes in his various companies were put on the public markets, they'd be worth roughly $3 billion. That would make Virgin a medium-to-big sized company. What's remarkable is how Branson created all this value. He put up only $26 million of the more than $90 million that created Virgin trains, but he owns half of it. He also has half of Virgin Direct, for which he says the Australian firm AMP provided most of the funding. Taking Virgin Mobile phones to Asia, Branson got Singapore Telecom, like Singapore Air a government-linked company, to put up half of the $100 million start-up capital, and SingTel may inject another $400 million in convertible loans. Some brands sell products. Virgin's product is the brand, and the real customers are his deep-pocketed partners. As long as they think Virgin stands for something, Branson's in business.

Tempest in a Tea Cup

1990-09-15T23:12:00.000-07:00

June 17, 2002
Time Atlantic

LONDON--The history of modern drug addiction might be said to start, innocuously enough, with a cup of tea. London diarist Samuel Pepys recorded his first taste of "tee (a China Drink)" in 1660; by the early 1700s, as cheap sugar to sweeten the brew poured in from the West Indies, the entire nation was on its way to becoming hooked. Some Englishmen were soon knocking back 50 cups a day. The English East India Company, which held the monopoly on all Eastern imports, saw its tea sales grow from 97,000 kg in 1713 to 14.5 million in 1813, making tea its cash cow. The government, too, came to rely on Britain's new thirst. At one point, a third of the members of Parliament owned shares in the East India Company, and taxes on its tea produced up to 10% of the Treasury's revenues. Clearly, it would be worth doing almost anything to keep such a business growing.

What the East India Company did was to become a global narcotics cartel. To get the silver that paid for the Chinese caffeine fix, the company turned to dealing a far more sinister drug--opium. Company ships never brought opium into China, but its rich Bengal plantations fed the demand. Millions of Chinese would ultimately die as a result of addiction, and the trade set the stage for the Opium Wars in which China lost Hong Kong. This nasty bit of history is recounted near the very end of "Trading Places: The East India Company and Asia," a tantalizing, if slightly frustrating, new exhibition at the British Library in London.

The show--a collection of artifacts and images of 234 years of Eastern trade--has raised hackles among British Chinese activists. A small but well-aimed campaign even convinced the library to tweak the exhibit's panel text to better reflect the dark side of the Company's activities in China. "The Opium Wars marked a turning point in history," says campaign organizer Steve Lau, who runs the Web site www.britishbornchinese.co.uk. "Chinese refer to the next century as the 'hundred years of shame.'" The library seems blindsided by the controversy: it hadn't actually ignored the East India Company's opium trade, and the company was all but dead by the time the Opium Wars began. And who would have guessed economic history could arouse such passions?

Considering that the "Honorable Company" virtually created British India and the Empire, what's really surprising is that only the Chinese have chimed in. In the mid-1700s the company also ran a robust trade in Indian textiles, with a private army to defend its bases. "All this happened with Asian permission and Asian partnership," says curator Anthony Farrington. "And Asian complicity in the business of making money." But the balance of power tilted after the military exploits of Company man Robert Clive transformed the firm into a territorial power. From private trading rights and "presents" from the locals, Company employees became rich while bleeding the Bengal economy. But the cost of expansion also nearly put the Company out of business, drawing the British government into India.

You could miss some of this if you walk too briskly through "Trading Places," which goes easy on the geopolitics and focuses instead on the trade itself and how it shaped British and Asian taste and culture. Portraits of Company men comfortably set up in their new eastern homes--one poses with his Indian lover and their children--and the exotic chintz, porcelain, and tea sets snapped up by fashionable Brits all testify to the discomforting link between warm-and-fuzzy multiculturalism and hungry global capital. The trouble is, the Company can occasionally come off as nothing more threatening--or awe-inspiring--than an international plate collectors' club. What's missing from "Trading Places" isn't a medicinal dose of political correctness, but the full drama of early capitalism and conquest.

Over Here...

1990-09-15T23:11:00.000-07:00

May 13, 2002
Time Atlantic

Maybe it's time for Britain to secede. No, not from the European Union. From the United States of America. Eight months into the U.S.-led war on terrorism (and maybe on Iraq too), all those old jibes about the U.K. being the 51st state are hitting too close to home for many Britons. Prime Minister Tony Blair's new position as George W. Bush's very best European chum might be good geopolitics--Blair believes only an active ally can temper the conservative President's instinctive unilateralism--but it hasn't played nearly so well at home, particularly among Blair's base of Labour supporters. The phrase "America's poodle" comes up a lot in the press and down the pub these days. So does "pussycat." Marking her brother-in-law's fifth anniversary in power last week, writer Lauren Booth (Cherie's sister) put it rather more vividly in the daily Independent: "He may be on the world stage, but he's just nosing Bush's crotch."

When it's not the P.M.'s own family and party griping about this too-special relationship, it's his fellow European leaders. Continentals have always been baffled by their island cousins' obsession with the pound, Imperial measures, and their God-given right to extra-curvy cucumbers. And now that the euro is up and running and Europeans are ready to move on to even bigger projects, like E.U. enlargement and real political union, Britain's aloofness is that much more irritating. "I wonder what makes this great nation so confident when dealing with a vastly more powerful nation over 3,000 miles away," said European Commission President Romano Prodi in a speech at Oxford last week, "but afraid to play a full part in shaping the future of the Continent to which it belongs."

Must Britain choose between the U.S. and Europe? A searing new book, The World We're In by Will Hutton, reviewed opposite, offers an unequivocal yes--and declares Europe the deserving winner of British affections. The book is a sequel of sorts to Hutton's 1995 The State We're In, an indictment of markets-first politics that was a surprise best seller during the waning of Tory rule and remains an almost sacred text among the many leftish Brits who feel betrayed by New Labour's rightward drift. But this time around, America rather than Thatcher and the City of London is the villain of the piece. With 40% of British respondents to a recent MORI poll for TIME saying that their government has been too supportive of U.S. foreign policy since Sept. 11, Hutton has scored a well-timed hit, which won't hurt The World We're In in the buzz department. But although Hutton has some sharp words for U.S. military and political unilateralism, the former business journalist's chief complaint remains economic. The American influence, he argues, is making Britain poorer.

Come again? Conventional wisdom holds that Britain--by far the most U.S.-like economy in Europe, with flexible labor markets, shareholder-driven corporations and high, debt-fueled consumer spending--has weathered the global economic slowdown pretty well, considering. Unlike Germany, the U.K. has so far avoided recession since September. British unemployment, already far below the likes of France and Italy, hit its lowest level in over 25 years this March. London, the natural landing place for big American banks and English-speaking multinationals, remains the envy of Europe's financial centers. "The language and our institutional openness made us easy winners in globalization," says Hutton, who now runs a London think tank-cum-consultancy called the Work Foundation.

But maybe it was too easy. "We've used globalization as an excuse for not asking all these questions," says Hutton. Such as? For a start, why hasn't the the vaunted flexibility of the British workforce done more to cure the county's stubbornly low productivity? A third of British men now regularly work a very American 50 hours a week or more, but the U.K. overall still is only about as productive (per capita) as France, land of the strict 35-hour workweek. Not an attractive bargain. Or what about the state of Britain's public services? Privatization and tax cuts clearly haven't been kind to them. So no matter how much more money the average Briton might have in his pocket today, it still can't buy him reliable service on any of Britain's broken-down, strike-prone railways. Nor can it push him to the front of the queue at an overcrowded NHS hospital.

For these woes and more, Hutton prescribes ditching American laissez-faire and turning toward Europe. A wholehearted embrace of the European Union--and, of course, the euro--is just the first step. He also wants a return of government to vital public services and a radical shift in the way the U.K. runs its businesses. Although the U.S. didn't invent stock-price-driven management--"Long before America had shareholder value, we had short-termism," Hutton says--the power of the U.S. capital markets in the 1990s helped cement the dubious notion that quarterly earnings come first. It's too easy to make a list of once-great British companies that blew it by chasing City fads: start with Marconi. Hutton argues that Britain would be more productive if, as in Germany and France, companies had to answer to interests besides professional money managers, such as government shareholders, regional banks and strong unions. That, he says, would focus CEOs' minds on the long term.

Hutton's brief for so-called stakeholder capitalism isn't new. What gives it fresh rhetorical power now is the sight of so many of the icons of America's late, great bull market--from Enron to WorldCom--taking the fall. Yet here's the rub: continental Europe itself isn't so convinced that it has the winning formula. After years of underperforming the U.S., Europe's managers and policymakers are slouching toward neoliberalism too. (Hutton thinks the U.S. bubble has definitively burst, but America's GDP growth of 5.8% in the first quarter of 2002 suggests this call may be too pessimistic, or at least early.) After a wave of Socialist-approved privatizations, French managers must increasingly answer to foreign shareholders. Lower capital-gains taxes in Germany should spur the breakup of the corporate cross-holdings that protect Deutschland Inc. And the loudest advocates of labor flexibility on the Continent aren't American investment banks, but Europe's central bankers. Hutton is right: the U.K. should be more engaged with Europe. But it will still have to come up with its own answers for its problems.

What the French Know About Globalization (A Lot More Than They're Letting On...)

1990-09-15T23:08:00.000-07:00

April 22, 2002
Time Atlantic

With reporting by Joe Perry

A tale of two companies--appropriately enough, one in London and the other in Paris. Orange, the wireless telephone operator, looks very much like a British firm. Launched in the U.K. in 1994 by subjects of the Queen (a Canadian backed with Hong Kong money), it has become one of the country's best-known brands and its most popular mobile network, with more than 12 million active subscribers in Britain. Its current CEO lives in Kensington and goes to work in W1. But Jean-Francois Pontal is also a Frenchman who was sent to Orange by France Telecom, the partly state-owned utility that bought the firm in 2000 and still holds 85% of its shares. Orange, in turn, now runs its parent's old mobile network in France from London. "The language of Orange is English, everywhere," says Pontal, who avoids West End theater because his own English isn't quite sharp enough. "So Orange is not really a typical French company."

Or maybe it's a lot more typical than most French would like to admit. To see what we mean, just hop the Eurostar to Paris, and look up the head office of Suez, in a refurbished hotel particulier a short walk from the Elysee Palace. Here is a deeply French enterprise, whose complicated history is intertwined with the nation's. In the 19th century, when France was still a world superpower, one of its corporate ancestors built and operated the Suez Canal. After World War II, another branch of the family, Lyonnaise des Eaux, lost its gas and electricity businesses to the state. And in 1982, Socialist President Francois Mitterrand, as part of a massive public takeover of the French economy, nationalized Suez (which by then was mostly a bank) outright.

But that company is barely recognizable in today's Suez. After CEO Gerard Mestrallet took over the reprivatized company in 1995, he began unraveling Suez's vast collection of businesses, and got out of banking. "I realized it wouldn't be possible in the international financial market for us to be a diversified holding company any more," he says, explaining that investors on Wall Street and in London pay more for so-called pure plays. Mestrallet has focused Suez on its global water, energy and waste management businesses. Result: the majority of Suez's revenues come from outside France, and about half its shares are foreign-held.

Suez and Orange are just two examples of what Philip Gordon, senior fellow at the Brookings Institution, calls France's "globalization by stealth." Look at how the rest of the CAC 40, France's leading share index, does business these days. Half of automaker Renault's profits in 2001 came from its partnership with Japan's once-ailing Nissan Motor, which Renault is helping to revamp. Cement maker Lafarge, even though it's in a naturally local business (cement being costly to ship), gets over 85% of its sales from outside France. Meanwhile, oil producer TotalFinaElf, Jean-Marie Messier's Vivendi Universal and financial services giant Axa are all mostly owned by non-French investors. In all about 40% of French shares are in the hands of foreigners. That's more than in Germany or even in that free-trade bastion Britain. "You are starting to get to the point where these are not even French companies," says Gordon. "If foreigners own them, and they sell their stuff to foreigners, they're global companies with headquarters in France."

So much for l'exception francaise. The French as much as foreigners cherish the stereotype of a proud but often insular nation that still plays by its own economic rules. Yet on the home turf of Jose Bove--where a Marks & Spencer going-out-of-business sale is regarded as a crime scene, and politicians of all stripes must be seen defending the monopoly of the state-owned Electricite de France--France's corporations have proved to be not the victims of globalization but among its most effective agents. And French managers say, with little regret, that they are more exposed to the rigors of Anglo-Saxon shareholder capitalism than their counterparts in the rest of Continental Europe. Perhaps instead of vandalizing McDonald's, the kids in balaclavas would do as well to smash up a few Renaults.

How did France get here? As a rich but medium-sized economy, it has always had much to offer the rest of the world, particularly in industries that require serious know-how. Take the water business, which is dominated worldwide by Suez and its French competitor Vivendi Environnement, formerly Generale des Eaux. Both firms specialize in concessions, or deals to invest in and run a city's waterworks over a long contract of, say, 30 years, without actually owning the assets. Contrary to France's image as a strictly state-led economy, Mestrallet says, "We French invented the concept of private management for public services." Once the two rivals had split much of the domestic market between them, foreign markets were the logical next step. Cities including Buenos Aires and Casablanca now get their water from Suez. (Selling water for profit in poor countries has, incidentally, made Suez a natural target for globalization foes outside France.) "Suez had to catch the growth where it was, and it was on the international market only," says Mestrallet.

France's openness to foreign capital--if not to actual foreign takeovers--is more surprising. Ironically, it's a product of the French exception. The Socialist government of Lionel Jospin has privatized more assets than the six previous governments combined, but maintaining France's social safety net was part of the bargain. The French pay high taxes--some 45% of GDP in recent years--to support generous public health-care and pension benefits; they don't need to play the market to win a secure retirement. Though stock ownership is on the rise, less than 13% of the French hold shares, compared to 23% of Britons.

Those privatized companies had to go somewhere for capital, and they've largely turned to American and British fund managers. It has radically changed the job of the French executive. "These guys are from the civil service, and they were used to talking to ministers," says Elie Cohen, an economist at Paris' Institute of Political Studies. "Now they have to deal with some small guy from Wall Street."

The state still holds big chunks of some of France's key companies: just over 25% of Renault, 22% of Thomson Multimedia and 55.5% of France Telecom. But executives at most such firms insist the state is just another investor. "I have never received an order from the government as a shareholder," says Thomson CEO Thierry Breton, who was appointed by the government to revive the consumer electronics firm in 1997. "I propose, and then we discuss." Considering the Jospin government's track record, that's probably true. Renault, for one, has arguably been freer to cut jobs than Volkswagen, which counts the state government of Lower Saxony among its shareholders.

The influence of Wall Street and London can be a mixed blessing. Just look at France Telecom. The company's shares have lost half their value over the past year, largely as a result of its towering 60.7 billion[euro] debt pile, amassed during the telecom boom as boss Michel Bon invested in foreign businesses including Orange, cable operator NTL and MobilCom in Germany, and snapped up high-priced 3G licenses outside of France. Some financial analysts blame the state: they say France Telecom might have tended its balance sheet better if it didn't have one big, reliable shareholder backing it up. But the real problem is that Bon and company fell for the same market hysteria as the rest of the industry. "France Telecom doesn't make silly choices because it is state-owned," says economist Cohen, who used to sit on France Telecom's board. "NTL and MobilCom are silly choices made by silly management."

Whoever holds the shares, French corporate life remains distinctive. Orange notwithstanding, French corporations have been slower than their Germanic rivals to adopt English as their lingua franca. "The difficult thing," says Michel de Virville, general secretary in charge of human resources at Renault, "is to make sure that our guy in Hungary, who speaks only English and Magyar, can call and the telephone will be answered in English." But French managers may have one advantage over the Anglophones when they do business abroad: they aren't as arrogant. "We French disagree on so many things among ourselves that we are accustomed to not thinking there is one single way," says Bertrand Collomb, CEO of Lafarge, which has operations from Poland to Korea.

France could even teach some of its economic rivals a thing or two about open markets. Consider the case of Electricite de France. In spite of President Jacques Chirac's stand in March against opening up the residential electricity market to competition, France's industrial energy market--the one EDF competitors like Mestrallet are really interested in--will be wide open by 2004. Mestrallet compares that situation to the U.S., where 50 separate states can say yes or no to deregulation. "The U.S. started deregulating energy 20 years ago," he says. "Today I would say we are catching up. We are moving faster and in a more continuous way."

An American might be surprised to hear all this, but then again so would many French. The globalization debate in France flares up over emotionally charged, one-off stories, such as last year's layoffs at Danone or Jean-Marie Messier's move to New York. But overall, corporate France's own active role in globalization has been a low-profile affair, perhaps because neither left nor right want to talk about it. The politicians "haven't really got the French to buy into globalization," says Brookings' Gordon. "In fact they've often done the opposite, with endless speeches about the need to tame it and contain it." This is fine as long as the economy keeps growing, but in leaner times the public could be far less willing just to let France's increasingly foreign-held companies follow the market's lead. Even if globalization is a done deal in France, the debate over it is far from settled.

Listening To Money Talk

1990-09-15T23:05:00.000-07:00

April 30, 2001
Time Atlantic

It isn't easy interviewing British historian Niall Ferguson. One very simple Q. can elicit 10 solid minutes of A. Ferguson gallops from an explanation of the differences between the economies of imperial Britain and NASDAQ America to the corrupt fortune Prime Minister William Gladstone made from his investments in Egypt in the 19th century and on to Ferguson's own loathing of sport-utility vehicles. "The fact that family cars are becoming trucks," says the Calvinist-reared Scot, "is a grotesque expression of what the U.S. economy is doing."

Some clever, loquacious people are said to think in paragraphs, but Ferguson seems to think in books. Very, very big books. Just 37 years old, the Oxford don has already produced a 1,000-plus-page history of the Rothschild banking dynasty and a 460-page account of World War I called The Pity of War. By the standards of history, Ferguson's books are wild best sellers, enough to win him an $860,000 three-book deal. Now here's The Cash Nexus (weighing in at 420), which was meant to be a history of bond yields but expanded into a sort of Professor Ferguson Explains It All for You. Ferguson surveys 300 years of political and financial history to argue, contrary to Marx, that capital is not history's irresistible force. Instead, the economy as we know it was shaped by war, which consumes so much money that it's pretty much the reason taxes and bonds were invented.

If this all sounds like heavy sledding, sometimes it is. But Ferguson, who has moonlighted as a newspaper columnist, carries the reader through with his lucid writing and a knack for counterintuitive, even outrageous, argument. The Cash Nexus ends with a brief for more militarism, especially from the rich U.S. "We've got economic globalization very much on a 19th century model," Ferguson says. "But there isn't a global policeman with the kind of interests Britain had then."

Q. How does a historian get interested in bond yields?

A. It came about because of my history of the Rothschild dynasty. For the Rothschilds, all political information had financial implications. A revolution meant bond yields would go up 5 points, and war meant they'd go up even more.

Q. What can yields tell us?

A. The origins of World War I look completely different when you look at them through this lens. The war only hit the markets two weeks after the assasination of Archduke Francis Ferdinand in Sarajevo, so until that point the origins of the war haven't begun. And anyone who says they began in the 1870s when German unification makes war inevitable is basically talking nonsense.

Q. You're concerned that the U.S., unlike the old British Empire, is economically and politically isolated. Is that really dangerous?

A. The danger isn't to the U.S., and that's the problem. The U.S. can afford to be another planet in its own eyes. I think one of the reasons intervention was so late in Rwanda was that people couldn't see the point of risking "our boys" in...where's that? Large parts of the world are degenerating into anarchy, and the consequences are not felt by Americans but by Africans.

Q. Why aren't more academics better writers?

A. There's this sense that if your books are readable they must be facile. People who bought The Pity of War expecting tales of life in the trenches would have been shocked. It's very analytical. But I suffer from a compulsion to explain. History is a public subject, and it only lives if it's read and discussed.

Q. Does being well-paid change how you work?

A. It would have been impossible to do the Rothschild book in five years without research funds. We'd be having this conversation in 2015.

Out With The Old And In With The Euro

1990-09-13T20:34:00.000-07:00

January 14, 2002
Time Atlantic

Reported by Bruce Crumley, Nicholas Le Quesne and Delphine Schrank/Paris, James Graff/Brussels, Jeff Israely/Rome, Angela Leuker/Vienna, Andrew Rosenbaum/Amsterdam, Ursula Sautter/Berlin and Chris Thornton/Dublin

There are few things more banal and downright grubby than paper money and small change. In an era of electronic commerce, serious capital--the stuff that buys shares in companies, builds factories or pays a mortgage--flits unseen from one bank account to the next. The cash in your pocket is for groceries and train tickets, for a schoolchild's spending money or a handout to a beggar. It gets rolled up for snorting drugs, or lost for years under sofa cushions. Shop clerks and bank tellers at the end of the day have to scrub off the black grime money imparts to their hands. But last week, when 12 European nations rolled out the single currency euro notes and coins, those intrinsically cheap little tokens--inoffensively illustrated with maps or imaginary monuments--managed to make Europeans feel they were part of something rather grand. Maybe never one great nation, and not yet a proper state, but for once a real community.

Europeans have often been disdainful of the European Union's ambitious but remote project of political integration. They have scant understanding of the inscrutable institutions of Brussels, which pour forth picayune rules on everything from bird hunting to the curvature of cucumbers. The debut of more than 10 billion new banknotes, legal tender from Helsinki to Palermo, has given 300 million Europeans their first concrete experience of union. An Austrian who stood in a long bank queue to get her first walletfull of euros could go home and see Spaniards doing the same thing on television. European Parliament elections just don't get this kind of saturation coverage.

Even better, it all pretty much went according to plan. In the hours leading up to the Jan.1 switch, there were still a few nagging anxieties that the euro could turn out to be a Y2K-like disaster for real. But those visions of self-destructing cash machines and riots in supermarkets didn't materialize. True, the banking network was stretched pretty thin. Banksys, the group that operates Belgium's atms, recorded some 600 cash withdrawals a minute in the first two hours of the new year. Two hundred Dutch post offices, which also function as banks for many small savers, weren't ready to open their doors on Jan. 2, the first business day of the euro era. The one real laggard appeared to be Italy, whose conservative government has been unusually cool toward the euro. Italians complained of a short supply of coins, and they used euros for just 3% of cash transactions on Jan. 2, compared with a rate of 50% in the Netherlands.

And, yes, there were plenty of long lines. In France, motorways backed up as drivers eager to break their francs into euro-change skipped the credit card and electronic "smart-pass" lanes and flooded tollbooths. Meanwhile, some small shopkeepers have resisted government urgings to get the old currency out of the system by giving euros in change for deutsche marks, francs or pesetas. "I am not a bank," gripes a vegetable seller at the Place d'Aligre outdoor market in Paris.

For the most part, though, Europeans greeted the launch with good humor and even a measure of civic-mindedness. A national French bank tellers' strike scheduled for Jan. 2--widely viewed even in union-friendly France as an opportunistic shakedown--fizzled out after almost everyone showed up for work. And those much-photographed queues outside some banks were strictly voluntary displays of euro enthusiasm, since in most countries the old currencies are still good for at least another month. The Creditanstalt bank in Vienna opened for five hours on New Year's Day and found itself swamped with customers trading in their schillings for euros, even though almost no stores were open to take either currency.

Accepting the new money is one thing. Getting used to it will take a little longer. For the next few weeks, Europeans will live like tourists in their own country, pondering over price tags trying to decide if that new sweater or television set is a bargain or a rip-off. Most Italians will no longer be millionaires, and the French will have to cope with the fiddly exchange rate of 6.56 francs to 1 [euro]. ("It's easy," says another Paris greengrocer, displaying his mathematical prowess. "You just divide by 50% and add that to the original, then times by 10 ..." Well, the good news is that big banks like Societe Generale have passed out free calculators.) Even the Germans, who merely had to chop the old deutsche mark prices in half, seem slightly perplexed. Almost 50% of Germans polled by Allensbach, an opinion researcher, thought a new Volkswagen Polo priced at 26,000 deutsche marks was expensive, but only one-third said the same thing about a VW priced at the equivalent 13,000 [euros].

Naturally, this had led to worries about merchants taking advantage of the confusion by sneaking in price hikes, or just rounding up their prices with the conversion. At Bar Pamphili in Rome, a single espresso costs 1,100 lire, the equivalent of 57 euro cents. Pay in euros and the same cup costs 60 cents. "We rounded all the prices, some up and some down," owner Giuseppe Scaramuzzo is quick to explain. "Anyway, today is just the first day. It's like an experiment." The early evidence is that most businesses have played fair, with a little cajoling from watchful consumers and national governments. In Italy, playing games with the exchange rate can, in theory, earn a shopkeeper a very round 1 million [euro] fine and even jail time.

In the long run, the greater transparency of euro pricing should also work to the advantage of consumers. "I'll tell you what will make me feel more European," says a security guard watching at Dublin's General Post Office, where child benefits are being handed out in stacks of 5 [euro] notes. "When we start paying the same as people on the Continent." Well-traveled Europeans instinctively know that prices are cheaper in some countries than in others, and now it will be that much more obvious. "Manufacturers and multinational corporations will have to explain the difference," says Carmel Foley, Ireland's director of consumer affairs. "That sort of scrutiny will exert downward price pressure."

Already, the cost of all this to European businesses has been monumental. France's Carrefour supermarket chain spent four years getting ready for the euro and has had to put 3,500 extra staff on duty since Jan. 1 to man 20% more tills in order to cut down on queues. And compared to many businesses, Carrefour has it easy. "In our hypermarkets, only 25% of transactions are settled in cash," says Vincent de Meaux, who directs Carrefour's changeover effort. "For the 75% that are made with credit cards and checks there won't be any problem." German vending machine operators, on the other hand, have to euro-ize every single one of their game terminals, jukeboxes and cigarette machines, which for older models could cost as much as 750 [euros]. "It's been a great burden to us," says Jan-Peer Henke of the German Vending Machine Association.

Why impose that burden? In spite of the hoopla about the arrival of the bank-notes, the economic performance of the euro hasn't been anything to cheer about. Since the launch of the electronic version of the currency in 1999, it has lost more than 20% of its value against the U.S. dollar. The inflation-wary European Central Bank in Frankfurt has frustrated almost everyone with its reluctance to cut interest rates, though the Continent is sliding closer to recession. Even amid last week's euro-phoria, the bank managed to be a source of discord. Back in 1998, the French thought they had a gentlemen's agreement that E.C.B. president Wim Duisenberg would resign soon after the introduction of the notes and coins, in favor of a French candidate--mostly likely Jean-Claude Trichet, governor of the Bank of France. Duisenberg, who is Dutch, now says he'll stay for at least one more of the four remaining years in his term.

For all the advantages a single currency offers--stable cross-border trade, ease of movement for people and products--it has also made Europe's economies more difficult to manage. The E.C.B. must set a single interest rate for both rural, still-developing countries such as Portugal and advanced industrial economies like Germany. Unlike governments in other vast currency areas--in particular, the United States--the European Union doesn't yet have the power to adjust for those regional imbalances with federal taxes and spending.

Europe's policymakers nonetheless hope to see the euro replace the yen and even the dollar as an international store of value. This week, German Finance Minster Hans Eichel is traveling to Iran and China to encourage central banks there to take in more euros as reserve currencies. It's probably true that the euro is undervalued by financial markets right now--but for the currency to really punch its weight, Europe may have to change in ways its citizens never expected and won't much like.

One of the orignal selling points of the euro was that it could make Europe a serious economic contender with the U.S., which Continental Europeans typically regard as a bit too capitalist and market-driven for anyone's good. Yet the whole logic of the euro undercuts the Continent's social-democratic status quo. "The euro is going to spur restructuring in most sectors of the European economy," says Christian de Boissieu, professor of economics at the Sorbonne. "It's like deregulation. In both cases, you end up with heightened competitive pressure and a squeeze on margins, leading to a race to increase market share and greater concentration." Encouraging companies to slim down and move where the market is may spur economic growth, but plant closings and layoffs usually follow. It remains to be seen whether Europe's politicians and voters are really ready to trade in the old social contracts and let the euro really work.

For the time being, though, the euro is more about visionary politics than quotidian economics. The dream of economic union began with the founding of the European Coal and Steel Community in the 1950s, when the bloody trauma of World War II was still a fresh memory. To finally get to a single currency, the 12 euro nations had to surrender some cherished symbols of nationhood. The Greek drachma, which circulated as far as Afghanistan in the age of Alexander the Great, and the modern deutsche mark, a symbol of postwar and post-reunification German strength, have been consigned to the dustbin of history.

But the euro offers its own powerful message: each member gets to mint the currency, so German-made coins, stamped with the nation's familiar eagle symbol, will circulate innocuously in France. Likewise, Germans will soon find Liberte, Egalite, Fraternite on some of their small change. "No more wars in Europe," says a hopeful Antonio Esposito, 54, a native of Naples who has lived in France for the past three years. "We know now that we will live in peace." And with some luck, prosperity too.

Europe's New Raiders

1990-09-13T20:23:00.000-07:00

October 1, 2001
Time Atlantic

With reporting by Bruce Crumley/Paris

MILAN-- If you have an image in your mind of a fearsome corporate raider, chances are Romain Zaleski doesn't fit it. Visit the Frenchman at his compact suburban townhouse near Milan's Linate Airport, and he'll amble down to the driveway to greet you and then introduce you to his big, too-friendly dog named Elliot. There's a makeshift office in the basement from which Zaleski, 68, keeps in touch with the business manager of his closely-held steel company, Carlo Tassara, based in the northern Italian town of Breno. He holds meetings on his sunporch overlooking the little back garden. It's pretty much what you would expect from a prosperous small businessman easing toward retirement.

Don't be fooled. This summer, the relatively unknown Zaleski helped organize one of the most audacious hostile bids in Italian history. A group of investors including Zaleski, the state-owned utility Electricite de France (EDF), and Turin's Fiat in August finally took control of the energy-industrial conglomerate Montedison. The deal won EDF, a French monopoly, a foothold in the lucrative Italian power market, and it even made Mediobanca, the influential Milan investment bank that owned 15% of Montedison, look vulnerable to hostile outsiders itself.

But the biggest impact of the takeover may be this: it showed how relatively small but canny investors like Zaleski can come out of nowhere to shove European corporations into radical change, whether they like it or not. A fierce new breed of disruptive capitalists--including wealthy industrialists like Zaleski and his countryman Vincent Bollore, as well as private investment companies such as Switzerland's BZ Group--has emerged on the Continent. They have fought to rip companies out of the hands of the old families and venerable financial institutions that have always been in charge. They can become heroes to their fellow minority shareholders and to traders, who stand to make big gains from the takeovers, mergers and breakups they inspire. For better or worse, they are changing the rules of the European economy.

Not that they always set out with such lofty intentions. Zaleski's involvement in the Montedison affair began in 1995, when he was looking for a cheap stock in which to invest some of Tassara's assets. A former French civil servant, he had first come to Tassara in the early 1980s to work as consultant for the family company then on the edge of bankruptcy. He soon became Tassara's majority owner, returning the steelworks to profitability in part by keeping its power costs under control. When he had about $100 million or so to invest--"Not big money," he says--another family-controlled steel group called Falck seemed a natural choice. It was developing its own promising energy business, and it traded below $2 a share.

Zaleski eventually collected some 40% of Falck, more than the Falck family itself. In autumn 2000, Mediobanca-backed Montedison (then called Compart) made a public offer of $8.30 for Falck shares. Zaleski resisted at first, arguing the price wasn't good enough, but he figures that when he cashed out he had tripled his money. Next he bought shares in Montedison itself. "My hope was to get back a part of the profit I had to renounce," he says.

What he got was another fight. To complete a Montedison takeover of Falck, Mediobanca supported an offer to buy the Falck family's stake in a share conversion worth more than $12 a share, or almost $3 more than everybody else got. Zaleski and other shareholders managed to block the move, and the victory showed him that a full blown coup (his word) was now possible. In May, he went to Paris and met with EDF. Zaleski sold a third of his 15% stake in Montedison to the utility, giving it 20% of the firm. EDF insists that it had no plans at that time to participate in a bid for Montedison. But the rest, as they say, is history.

Though it took the mighty Agnelli family, which controls Fiat, to mop up at the end, the raid may never have happened without Zaleski. He owned a swing vote in Montedison that the other big players wouldn't or couldn't buy for themselves. "I think big companies have the advantage of being strong, but they have difficulty taking risks," he says. "Fiat and the Agnellis cannot fight and not win. I can lose, and they cannot."

So does Zaleski have any more plans to turn corporate Italy on its head? "No, no," he says, laughing. "Once is enough."

Some of the brightest names in French business doubtless wish that Vincent Bollore was so easily satisfied. For the past half-decade, Bollore has been making big investments in companies and then loudly telling management exactly what he thinks they ought to do. Do these companies listen? Sometimes. But Bollore can make his money just by showing up.

Like Zaleski, Bollore is an industrialist by trade. His company, which grew out of his family's paper business in Brittany, had sales of over $4 billion last year, with interests ranging from shipping in Africa to a so-far-unsuccessful line of paper casings for sausages. Bollore describes his stock market exploits as a part-time thing. "I am not sitting in my office with two assistants trying to find good investment opportunities," he says, casually leaning back on the sofa in his office suite, which overlooks the Seine. "Ninety-nine percent of my time is spent managing the group."

If that's true, consider the returns on the remaining 1%. In 1997, Bollore invested in the construction and communications group Bouygues. His public clashes with chairman Martin Bouygues--Bollore wanted Bouygues out of the telecom business--prompted market speculation of a takeover bid and helped drive the share price up. Bollore sold his 12.6% stake to Francois Pinault in 1998 at a profit of over $250 million. Next he invested in the film company Pathe; he got out of that one just two months later with a similar gain.

Last year, Bollore challenged the Lazard group, which includes the giant investment bank Lazard Freres. Like many French businesses (including, ironically, Bollore's), Lazard is controlled by a cascade of holding companies, each one owning a bit of another. This system can make it hard for outsiders to understand what's going on, or to exert much influence; as a result, the stocks tend to be thinly traded and cheap. So Bollore thought he saw a bargain in Rue Imperiale de Lyon, one of the companies in the Lazard chain. Bollore called for Lazard to simplify its ownership structure, and it eventually did so. But the payoff came for Bollore when the bank Credit Agricole bought his shares out. Another $250 million profit.

In France, this is not a polite way to make money. (When Carl Icahn started doing this sort of thing in U.S. in the 1980s, it wasn't much appreciated there either; they called it "greenmail.") A source close to one of Bollore's targets gripes, "Bollore's plan was to excite markets about a takeover without him ever having to put up the money." But Bollore thinks he's just helping the French market recognize undervalued but overcomplicated companies. He is to unfashionable stocks what Jean-Paul Sartre was to the Cafe de Flore. "Bouygues was like a restaurant or a bar that you are interested in but don't dare to enter," says Bollore. "When I went in, then everybody followed me."

Now, Bollore's sights are trained on Italy, where he has become one of the key shareholders of Mediobanca, Zaleski's old sparring partner. It looks like a classic Bollore bargain-hunting play, since Mediobanca has loads of valuable assets, including a coveted position in insurer Assicurazioni Generali, and trades at a modest share price. This time, though, the terms are friendlier: Bollore invested at the request of longtime adviser Antoine Bernheim, deputy chairman of Mediobanca.

It's easy to admire the likes of Zaleski and Bollore. They are clever and iconoclastic where their adversaries can seem hidebound and arrogant. But the rise of the lone raider in Europe isn't a blessing for everyone. Companies are learning that they are accountable not just to one or two friendly investors, but to volatile and demanding capital markets. That puts an ever greater emphasis on the short-term--meeting quarterly targets and improving margins. Companies will be quicker to sell off divisions that don't grow fast enough and more willing to fire workers who aren't productive enough.

The tension between a manager's long-range plans and a stock trader's natural desire for instant gratification is very much on the mind of CEO Marcus Wallenberg these days. His Stockholm investment company, Investor, seems a prime example of Old World capitalism. Though it is publicly traded, shares are split into voting and nonvoting classes. Wallenberg's family interests (primarily two non-profit foundations) control about 45% of the company's votes, while owning just over 20% of the firm's capital. Essentially a listed stock portfolio, like Warren Buffett's Berkshire Hathaway, the firm allows the Wallenbergs--a dynasty that shaped Sweden's economy over the 20th century--to maintain their influence at some of the country's best-known companies, such as Ericsson and AstraZeneca.

For Wallenberg, the point of Investor is to help nurture the companies in its portfolio by fostering contacts between them and bringing management expertise to their boards. "You can't be involved in a company like AstraZeneca or Ericsson unless you have a long-term view of the business," he says. This approach mostly works: though Investor shares have dropped sharply recently, its average total return over the past five years is a healthy 15%. But for some outside shareholders, Investor has another, simpler attraction: it usually trades at a steep discount--these days about 22%--to the net asset value of the shares it owns.

Swiss money manager Martin Ebner, perhaps the most successful activist investor in Europe, wants to close that gap. His BZ Group, based in the tiny town of Wilen, manages four mutual-fund-like investment companies. Ebner goes for the strategic strike--his Spezialitaten Vision portfolio, for example, holds just five stocks--and the size of his individual stakes gives him substantial sway over the companies in which he's invested. Ebner sticks around longer than Bollore, but the goal is the same: to get the share price up. In the late 1990s, for example, Ebner dogged Union Bank of Switzerland, of which he was the largest shareholder, into a merger with Swiss Bank Corp. that cost 13,000 employees their jobs. This year, he amassed 11% of the voting shares of Investor.

Ebner wants Investor to pump up its stock by either buying back some of its shares or splitting the firm into two parts, with one devoted to core holdings like Ericsson and the other to Investor's group of technology and health-care start-ups. These slimmed down portfolios would be easier for investors to understand, so they might be more willing to pay something close to net asset value for the shares.

"I do not intend to debate my shareholders in the media," says Wallenberg. "I think they have a complete right to their opinion." But Wallenberg is not planning any changes. Breaking the group up would mean severing Investor's business network. And a buyback would permanently shrink Investor: because it has no real business operations of its own, it would be difficult for the firm to go back to the stock market to raise cash later. "When we buy back shares, it's a form of liquidation," says Wallenberg.

Chances are, Ebner won't win this skirmish outright--it's tough to beat the Wallenbergs' 45% vote--though he could help push up the share price just by drawing the market's attention to the fact that Investor may be too cheap. And that may be the point. It takes a long-term investor to build a company, but sometimes you need a speculator to tell you what it's worth.

Reality Bites

1990-09-13T20:19:00.000-07:00

July 23, 2001
Time Atlantic

In a better sort of world, a book like Snake Oil and Other Preoccupations (Vintage; 285 pages) wouldn't exist. For a start, it would have been a completed book: author John Diamond, a popular Times columnist and the husband of the TV culinary goddess Nigella Lawson, died of cancer in March after writing just six chapters of an "uncomplimentary view of complementary medicine." That unfinished text--cut off, spookily, almost in midthought--is rounded out by an anthology of Diamond's newspaper columns, which show off his first-class deadline wit. (A story about being forced by his Hassidic computer repairman to say the Shema is a classic of the columnists' form.) Even Diamond's accounts of life with cancer can be darkly funny as well as harrowing. But as with all such collections, those stories, written to be read on the Tube or at the lunch counter, can't quite add up to a book you're likely to read straight through.

No matter, because the first six chapters alone are worth the cover price. Diamond's brutal debunking of alternative therapies such as homeopathy, reflexology and herbalism doesn't dwell on the scientific particulars. But why should it? You could have read a thousand times--perhaps in magazines like this one--that there's little or no scientific evidence for the promises made for many alternative therapies. And yet plenty of educated people regularly buy unproven "natural" remedies. (It's a multi-billion-dollar, multinational industry.) Diamond instead carefully defuses the anti-intellectualism that makes it possible to ignore the good science that questions such cures. "[Science] isn't one particular way of ascertaining a physical truth," Diamond writes. "By definition it is the way of ascertaining physical truth."

Such as the truth that painful chemotherapy shrinks tumors, and happy thoughts and magic crystals don't. In that better world, this wouldn't need pointing out. But it does. All the more remarkable that the one saying so here had every reason to wish otherwise.

It Ain't Heavy... It's My Debt

1990-09-13T20:09:00.000-07:00

April 16, 2001
Time Atlantic

Michel Bon, Chairman of France Telecom, is chatting by cell phone about 3G, a wireless technology on which he has wagered his career and his business. Suddenly, his voice starts to fade and become unclear. Then he disconnects completely. "I'm sorry," Bon says in his French-inflected English when he rings back a minute later. "My mobile, despite it is an Orange, I can say is not always perfect." France Telecom, of course, owns the lion's share of Orange.

If you want to understand why the European telecom industry is throwing more than $230 billion into upgrading to 3G--shorthand for third generation--look no further than Bon's occasionally dodgy telephone. (Not that the handsets linked up to BT Cellnet or Vodafone are any better.) Though mobiles have come a long way since the days when Gordon Gekko stood on the beach talking to a brick, you still wouldn't make a call on one if a landline was available. And if voice services are skimming the edge of adequacy, that's still more than anyone could say of the "mobile Internet." Even the biggest boosters of WAP-based online services compare their current offerings to such famously user-unfriendly products as DOS. Telecom operators need to carry more voice and data traffic more reliably just to continue growing and to keep their promises to the stock market. But right now there's just not enough room on the airwaves.

Enter 3G, which is set to launch in most of Europe by 2003. Running on a new network standard called the Universal Mobile Telecommunications System, or UMTS, 3G devices will have more bandwidth, which will enable faster data transmission. Not only does UMTS help solve the capacity problem for voice, it will allow "always on" Internet access and, eventually, even video and color graphics through your handset. So for consumers, 3G could be seriously cool.

For the big telecom operators and their investors, on the other hand, it looks more like a financial disaster. Bon's France Telecom has increased its debt to a staggering $55 billion in large part to pay for 3G. Likewise, Deutsche Telekom now owes $50 billion, and British Telecom $43 billion. (It's not all 3G; these firms have also been on acquisition sprees.) And here's the scariest part: there's no guarantee that 3G will fly.

How did the telecom industry get itself into this mess? The birth of UMTS just happened to coincide with the peak of the speculative rage for technology investments. In March 2000, the Spanish government sold some of the first UMTS spectrum licenses to four firms for a total of about $450 million, or roughly $12 for every Spaniard. "The market capitalizations of the companies that got these [licenses] rose by more than they paid for them," says Falk Muller-Veerse, European research manager for the investment group Durlacher. "So everyone said, 'We have to get these.'" Put another way, the stock market simply demanded that wireless operators elsewhere get on board the UMTS express. Asked why he paid so much for his UMTS license, one wireless ceo shrugs and says, "Do you know what my board would have done to me if I didn't?"

The real trouble came in the U.K. and Germany where, unlike Spain, the governments sold their UMTS licenses in auctions. The wireless operators bid prices for bits of the sky up to, well, the sky. Last year the U.K. and Germany won $32 billion and $45 billion respectively, sums that amount to almost $550 per capita. In total, European governments are likely to rake in $108 billion from the sale of UMTS licenses, according to Durlacher research. In hindsight, the telecom operators overpaid, since these days some UMTS airspace is tough to give away. Last month, Belgium found only three bidders for its four licenses.

"It was one of these giant gambles," says Ken Binmore, a University College London economist who helped design the British auction. "If 3G is worth anything, it is going to be worth immense amounts, but who knows if it will be worth anything?" Binmore--who is delighted with how the auction turned out for British taxpayers--adds that the telecom operators understood this risk going in. If anything, the technological prospects for 3G were even more doubtful a year ago. The big difference between then and now isn't the technology. It's the NASDAQ.

When Deutsche Telekom, BT and France Telecom were bidding their borrowed billions on licenses last year, it looked like the loans would be a lot easier to pay off than they are today. "We have a plan that will bring our debt down into the range of $27 billion to $36 billion by 2003," says Bon. A nice plan indeed, but mind the yawning $9 billion gap. (A company worth $9 billion on the London Stock Exchange might qualify for the blue-chip FTSE 100 index.) The reason the numbers are so vague is that the debt reduction plan depends on selling some of the firms' "non-core" assets, such as stakes in STMicroelectronics and Sprint FON Group. "We can sell more or fewer things or sell at higher or lower prices," says the France Telecom chief. Right now, fewer and lower look more likely. STM is 50% off its one-year high, while FON has dropped 67%.

And France Telecom may be the relatively lucky one. It's initial public offering of Orange earlier this year was a bomb, raising far less cash than the firm had initially hoped. Then again, says Standard and Poor's credit analyst Guy Deslondes, "At least the money is already in the house." Both BT and Deutsche Telekom have talked about similar public offerings of their wireless divisions to raise cash, but just who's going to buy all these new tech stocks now?

If IPOs and asset sales won't do the job, that leaves some pretty tough choices. Analysts speculate that BT might cut dividends or issue more shares at cut-rate prices in a rights offering. (BT did have some good news last week; it is reportedly close to selling its Yell online yellow pages in a private sale worth as much as $4 billion.) Another possibility is that the large telecom operators' credit ratings might fall into BBB range--the last bracket before junk-bond status--which would make it more expensive for them to finance future investments. Little wonder, perhaps, that some shareholders are calling for the heads of BT chief Peter Bonfield and Deutsche Telekom boss Ron Sommer.

Now imagine that the stock market miraculously recovers next week and everybody gets to cut their debt in half. There's still the sticky matter of whether 3G is actually going to work as advertised. The phones themselves exist mostly in the minds of engineers. Among the technical concerns is the fact that UMTS will at first be available only in urban centers. So you'll need a phone that works with existing standards, too, says Durlacher's Muller-Veerse. Such multiband phones will be more expensive at a time when operators are desperate to get away from subsidizing the cost of handsets. And they'll require more power, which could mean carrying around extra batteries or lugging a bigger phone.

The danger is that while the lab geeks are perfecting the handsets consumers will find other technologies that suit them just fine, allowing them to put off taking the plunge on 3G until a 4G comes along. John Moroney of Ovum, a consultancy specializing in telecoms, expects it could take five years before 3G becomes a serious consumer business. "There's already an existing good alternative: second generation voice plus SMS text messaging," Moroney observes. Then there's so-called 2.5G, which transmits data in a similar fashion to UMTS, but with more limited bandwidth. The innovative Japanese operator NTT DoCoMo, meanwhile, has designs on importing its own version of next-generation wireless to Europe. The really fun stuff like video streaming might come first through something called a wireless LAN, a network available in designated areas like cafes and hotels. Just think of a coffee shop as the new phone booth.

So is it abandon hope, all ye who own BT shares? Maybe not. France Telecom, Deutsche Telekom and BT all trade for less than half of their 52-week highs. So their share prices already reflect a lot--although perhaps not all--of the bad news about 3G. These big operators still have deep resources to help them survive the near-term shock of paying for UMTS. Deutsche Telekom generates billions in cash from operations, and last June was able to issue the largest-ever corporate bond, to the tune of $15 billion. Telekom's record was broken this year by none other than France Telecom. And 3G could eventually create all kinds of new opportunities for profits. Operators will be able to create unique services--from video games to real-time sports scores--which can reap higher margins than old-fashioned voice.

Just as important, wireless executives are beginning to look for ways to reduce the cost of building the UMTS networks, which Durlacher says could add another $126 billion to the 3G price tag. BT has indicated that it would be interested in sharing costs with other operators.

In Germany, the chief regulator of wireless is reportedly considering allowing some of the winners of that country's licenses to get together somehow. That's bad news, by the way, for telecom equipment makers like Nokia, which is on the hook for 3G as well. The firm announced last week that it is loaning $1.8 billion to France Telecom as part of a package to build UMTS networks. Nokia, like its clients, must figure that the only thing more expensive than buying into 3G might be not buying at all.

Borrow for Britain

1989-09-15T23:15:00.000-07:00

May 27, 2002
Time Atlantic

LONDON-- The British economy has come to depend on people like 26-year-old Rebecca Holyhead. She and her boyfriend Dave are about to put down the deposit on their first house. It may not sound like much--a two-bedroom semi-detached that used to be public housing, on the outer fringe of London and far from the Tube--but it's costing them a heady 150,000 [pounds], more than three times their combined annual salaries. (She's a nuclear safety engineer; he works in local government. Their parents are pitching in on the deposit.) Though it's a bit of a financial squeeze, Holyhead isn't complaining. "We actually feel quite smug," she says. "We put in our offer in January, but the property has gone up in value since then. If we were looking to buy fresh now, we couldn't afford the place."

Is this what a bubble looks like? Despite the global economic slowdown, the U.K. property market has been setting land-speed records this year. In April, the largest-ever monthly increase pushed the price of the average British home to 100,000[pounds], according to the Nationwide Building Society. That's over 16% higher than a year ago. And to help pay for these high-priced properties, Britons have also been piling on staggering amounts of debt, at a recent net rate of 7 billion[pounds] a month. They owe back at least 117% of their annual incomes, more than they did during the height of the 1980s boom, which ended with the collapse of the last great U.K. real-estate rally. In the difficult months since Sept. 11, the British economy has been kept out of recession by the willingness of consumers to continue their credit-card-fueled spending--and they're willing, for the most part, because rising residential property values have made them feel richer. But for how much longer can stretched borrowers be expected to keep feeding the property-market beast?

Maybe for a while yet. It's tempting to wag a finger at spendthrifts living beyond their means, or at the new breed of middle-class speculators taking out buy-to-let mortgages to become landlords. Yet most British borrowers look quite clear-eyed and rational once you've seen their household balance sheets. With base interest rates at a 38-year low of 4%, many feel they literally can't afford not to borrow.

Just ask Holyhead. She has paid rent of 750[pounds] a month for a one-and-half bedroom flat not far from her new house. Her variable-rate mortgage, on the other hand, will cost just 500[pounds] a month as long as rates hold. Overall, Britons pay only 8% of their income on interest payments, compared to 15% in 1990 after rates had soared into the double-digits, triggering the big credit crunch. "There is no evidence of people having pain servicing their debts," says housing economist John Wriglesworth of Hometrack, "despite lenders being very generous with their lending policies."

The trouble is, new mortgages last for 25 years and these relatively balmy economic conditions won't. One risk is that the economy, which grew a surprisingly sluggish .1% last quarter, doesn't pick up as strongly as economists expect and unemployment starts to rise. (Right now, it remains near historic lows at 3.2%.) Worried workers would cut back spending, and property prices could also fall as homebuyers became more cautious. Even those with secure jobs would suddenly feel poorer. "The debt would still be there, but the wealth would be eroded," says Jonathan Loynes of Capital Economics in London. The other risk is too much consumer-driven growth, which might get Bank of England Governor Edward George worried enough about inflation to push rates, and thus mortgage payments, back up--again, tamping down both spending and property markets. One of these two things is certain to happen eventually; how damaging it is depends on how abruptly it comes.

If this makes you nervous, take heart from the fact that none of this comes as a surprise to Sir Eddie. The Bank planned it to happen this way. "Policy has been keyed to engineering strength in the housing market and the household sector," says Loynes. The idea was to keep the consumer side of the economy going to make up for the sharp slide in the industrial sector. So far, it has worked. Last week, the Bank began signaling that a rate hike is on the way, but the evidence of an economic rebound remains ambiguous enough that even the relatively bearish Loynes doesn't expect anything drastic. With rates so low, however, small changes could have a big impact on homeowners' monthly bills, while continued low inflation means the real amount of their debt won't shrink as quickly as it once did.

So, yes, Britain's credit-rich homeowners have been economically rational--it's easy to be rational when things are mostly going your way. What's less clear is that they'll be able to play it so cool should trends reverse. There are tens of thousands of high-street financial advisers to push people into second mortgages when rates are low. Who will profit from telling borrowers, if and when the economy slackens, that it's time to scale back? The opposite danger is that even a tiny rate hike by the Bank of England could be read by the market as a sign of more to come, sending property prices down much too fast. "The U.K. housing market is driven by a lot of animal desires," says Loynes. "Fear of missing out. Greed." Sounds a lot like the stock market, actually. Except that you have to live there.