We believe in free markets and free people." We stands for free trade and sound money; against confiscatory taxation and the oppression of collectivists; and for individual autonomy against dictators, bullies and even the tempers of momentary majorities.
"No one has a right to harm another." Just a little thought, along with a few examples, would demonstrate that blanket statement as pure nonsense. Suppose there is a beautiful lady that both Jim and Bob are pursuing. If Jim wins her hand, Bob is harmed. By the same token, if Bob wins her hand, Jim is harmed. Whose harm is more important and should the beautiful lady be permitted to harm either Bob or Jim are nonsense questions.
During the 1970s, when Hewlett-Packard and Texas Instruments came out with scientific calculators, great harm was suffered by slide rule manufacturers such as Keuffel & Esser, and Pickett. Slide rulers have since gone the way of the dodo but the question is: Should Hewlett-Packard and Texas Instruments have been permitted to inflict such grievous harm on slide rule manufacturers? In 1927, General Electric successfully began marketing the refrigerator. The ice industry, a major industry and the livelihoods of thousands of workers, was destroyed virtually overnight. Should such harm have been permitted and what should Congress have done to save jobs in the slide rule and ice industries?
The first thing we should acknowledge is that we live in a world of harms. Harm is reciprocal. For example, if the government stopped Hewlett-Packard and Texas Instruments from harming Keuffel & Esser and Pickett, or stopped General Electric from harming ice producers, by denying them the right to manufacture calculators and refrigerators, they would have been harmed, plus the billions of consumers who benefited from calculators and refrigerators. There is no scientific or intelligent way to determine which person's harm is more important than the other. That means things are more complicated than saying that one person has no rights to harm another.
We must ask which harms are to be permitted in a free society and are not to be permitted. For example, it's generally deemed acceptable for me to harm you by momentarily disturbing your peace and quiet by driving a motorcycle past your house. It's deemed unacceptable for me to harm you by tossing a brick through your window.
In a free society, many conflicting harms are settled through the institution of private property rights. Private property rights have to do with rights belonging to the person deemed owner of property to keep, acquire, use and dispose of property as he deems fit so long as he does not violate similar rights of another. Let's say that you are offended, possibly harmed, by bars that play vulgar rap music and permit smoking. If you could use government to outlaw rap music and smoking in bars, you would be benefited and people who enjoyed rap music and smoking would be harmed.
Again, there is no scientific or intelligent way to determine whose harm is more important. In a free society, the question of who has the right to harm whom, by permitting rap music and smoking, is answered by the property rights question: Who owns the bar? In a socialistic society, such conflicting harms are resolved through government intimidation and coercion.
What about the right to harm oneself, such as the potential harm that can come from not wearing a seatbelt. That, too, is a property rights question. If you own yourself, you have the right to take chances with your own life. Some might argue that if you're not wearing a seatbelt and wind up a vegetable, society has to take care of you; therefore, the fascist threat "click it or ticket." Becoming a burden on society is not a problem of liberty and private property. It's a problem of socialism where one person is forced to take care of someone else. That being the case, the government, in the name of reducing health care costs, assumes part ownership of you and as such assumes a right to control many aspects of your life. That Americans have joyfully given up self-ownership is both tragic and sad.
Born in Philadelphia in 1936, Walter E. Williams holds a bachelor's degree in economics from California State University (1965) and a master's degree (1967) and doctorate (1972) in economics from the University of California at Los Angeles.
Sunday, June 14, 2009
The Drug Lord Who Got Away
Mexican Capo Unleashes Mayhem on U.S. Border; The Making of a Legend
BADIRAGUATO, Mexico -- As a child, Joaquín Guzmán Loera was so poor that he sold oranges to scrape together money for a meal. Since then, the 52-year-old has built a business empire and a personal fortune currently tied for number 701 on Forbes magazine's list of global titans.
He also has another ranking: Mexico's most wanted man.
Mr. Guzmán is the informal CEO of one of the world's biggest drug-trafficking organizations, the so-called Sinaloa cartel, named for its home state of Sinaloa. It smuggles a big part of the marijuana, heroin, cocaine, and methamphetamines that end up on American streets, and it has links to organized crime in 23 countries, according to Mexican and U.S. officials.
Mr. Guzmán's rivalries and turf wars have contributed to a drug-war death toll that stands at 11,000 in the past two and a half years, an average of 366 murders per month. His feuds stretch back more than two decades, leaving a trail of tombstones that act as milestones of the narcotics business south of the border.
Part Al Capone and part Jesse James, Mr. Guzmán has become a narco folk hero. He is feted on YouTube videos and by musicians who pen ballads, known as corridos, in his honor. He is known throughout Mexico simply as "El Chapo," Mexican slang for a short and stocky man.
Adding to his mystique, "El Chapo" has survived several assassination attempts by rival gangs, including a 1993 attack that killed a Roman Catholic cardinal. He also pulled off the greatest escape in modern Mexico: from a maximum security prison in 2001 -- in a laundry cart. Ever since, he has stayed a step ahead of Mexican and U.S. officials in a game of cat and mouse that is now in its ninth year.
Each year that Mexico is unable to catch "El Chapo" his legend grows -- a direct challenge to the authority of the Mexican state. Last year, he flouted authorities by hosting a party, complete with cases of whiskey and a norteño band, in a remote Mexican village to watch his 18-year-old girlfriend, Emma Coronel, win a local beauty contest. Months later, he married her.
With each year, too, questions grow about why Mexico, together with help from the U.S., can't find him -- despite a $5 million bounty offered by Washington (tips can be sent to chapotips@usdoj.gov) and a $2 million reward from the Mexican government.
U.S. and Mexican officials say Mr. Guzmán has used money and cruelty to build a well-disciplined organization that protects him. He is believed to be hiding in the towering Sierra Madre mountains that run through Sinaloa and bordering states, making the task of finding him a bit like finding Osama bin Laden in the forbidding mountains of Pakistan. Another factor: Mr. Guzmán is believed to have bribed enough Mexican law-enforcement and army officials to get timely tip-offs that allow him to avoid capture.
Culiacan, Sinoloa is the unofficial capital of Mexico's drug-trafficking business. Given the shortened lifespan for drug traffickers, shrines and mausoleums honoring fallen narcos have become an integral part of the city's landscape. David Luhnow and Jose de Cordoba reports from Mexico.
On at least three occasions during the past three years, Mexican security agencies have gotten leads on Mr. Guzmán, only to find he had vanished by the time they turned up, according to a U.S. official. Part of the problem is logistics. In the mountains, the capo's people can spot a caravan of military vehicles coming from miles away, giving him time to flee on anything from a helicopter to horseback.
Over the past few years, Mr. Guzmán has regularly visited a ranch in the remote mountains of Chihuahua state to check on his marijuana crop, according to a 2008 Mexican intelligence document reviewed by The Wall Street Journal. The ranch, owned by Mr. Guzmán's associates, has an airstrip and an underground tunnel for access. "On at least three visits, he has arrived with a caravan of at least six vehicles, under the protection of some authorities in the Mexican army," the document says.
Mexico's Defense Ministry said in an email that it was unaware of the allegations, but added that "various criminal organizations have used army clothing and vehicles as a cover for their activities."
In April, the archbishop in Durango, a state known for its scorpions, outlaws and rugged wilderness, declared that Mr. Guzmán was living there. "Just up the road from [the town of] Guanaceví, that's where he lives, but, well, we all seem to know this except for the authorities," Archbishop Héctor Gonzalez Martinez told local reporters.
Four days later, the bullet-riddled bodies of two army lieutenants turned up near Guanaceví in the trunk of a car, blindfolded and with their hands tied behind their backs. Next to the dead men was a note that read: "Neither the government nor the priests can handle 'El Chapo.'"
Purported sightings of Mr. Guzmán are common. In at least three Mexican cities, including Culiacán, Sinaloa's capital, people have reported seeing the capo turn up to eat at a local restaurant. They say he was preceded by bodyguards who confiscated diners' cell phones and didn't allow anyone to leave. As repayment for the patrons' brief loss of liberty, Mr. Guzmán was said to have paid everyone's tab.
An owner of one of the restaurants denies any such thing happened. But a Mexican intelligence report says that at least one of the restaurant stories is believed to be true.
Mexican officials say they don't want to get obsessed with capturing Mr. Guzmán at the expense of winning the broader war on drugs. "In the past, the strategy was just to capture top guys and ignore the operational guys. Now we are trying to weaken the structure of the cartels," says Attorney General Eduardo Medina Mora.
This week alone, Mexican troops arrested José Parra, a leading gunman for the Sinaloa cartel who police say was helping Mr. Guzmán's outfit wage war against the Tijuana cartel, a fight that claimed 749 lives last year. And in Durango, soldiers said they killed three of Mr. Guzman's gunmen, including the alleged head of his organization in that city, and captured two others.
A U.S. official agrees that the capture of Mr. Guzmán himself would do little to slow the illegal drug market, but said it would be a major coup. "Catching him would be like the capture of Saddam Hussein after the Iraq war," says the U.S. official. "His capture didn't stop the insurgency, but it was a huge victory."
Some U.S. officials believe Mexico will catch Mr. Guzmán soon. They say his status as Mexico's most wanted man forces him to be constantly on the move, making it harder to conduct day-to-day business. They say he has aged rapidly in appearance, and draw parallels to the late Colombian kingpin Pablo Escobar, who was finally killed after years on the lam.
"Chapo Guzmán is a dead man walking, and he knows it," says Michael Braun, who retired eight months ago as the head of operations for the U.S. Drug Enforcement Administration. "No one in his business lives to old age, or to enjoy his grandchildren."
But Mr. Guzmán has been underestimated before. In 2005, then Mexican Attorney General Daniel Cabeza de Vaca said Mr. Guzmán was "no longer operating" in the drug business. In early 2007, the current attorney general, Mr. Medina Mora, wrote off Mr. Guzmán as a has-been in the drug business.
Associates
From left, Mr. Guzman's brother Arturo "The Chicken" Guzmán was murdered in prison by a rival drug cartel; longtime associate Héctor "El Guero" Palma was captured in 1995 and sent to prison in the U.S.; Ignacio "Nacho" Coronel is now considered Mr. Guzman's top associate in the cartel.
(Photos, left to right: Reuters, Associated Press, Zuma Press)
"I don't care where he is," he told The Wall Street Journal in an interview. "He's like a washed-up soccer star."
A Central Figure
Since then, Mr. Guzmán has left little doubt he's a central figure in the drug war. Experts say it was his gang's push into northern Chihuahua state to try to wrest control of lucrative smuggling routes from rival gangs that has turned the place into a war zone. Some 3,300 people have been killed in the past 15 months, according to press reports. A separate feud between Mr. Guzmán and a former associate, Arturo Beltrán Leyva, led to a killing spree in Sinaloa that claimed more than 600 lives. Among the victims of the feud: Mr. Guzmán's 22-year-old son, Édgar, killed in a mall parking lot outside a Bridgestone tire-repair center in Culiacán.
Today, experts say Mr. Guzmán's group is battling other cartels in states as diverse as Chihuahua, Durango, Baja California, Guerrero, Sonora, Michoacan, and Quintana Roo.
Rivals
From left, brothers Benjamin, Francisco and Ramón Arellano Félix feuded over territory with Mr. Guzman's Sinaloa cartel for nearby two decades. They initially went to war to wrest control of the Mexicali border from Mr. Guzmán and Hector Palma.
(Photos: Associated Press)
In Culiacán, urban legends about El Chapo are daily bread. One says that a thief unwittingly robbed the capo's niece's car, and got his hands cut off by Mr. Guzmán's thugs as a lesson. In another, a former top state official reportedly fell for a local beauty and sent her an expensive gift. The gift was returned to his office along with a note from Mr. Guzmán saying the girl was his. "Send her another gift and I'll kill you," the note said.
Separating fact from fiction is difficult. Asking Mexican officials about El Chapo usually draws blank stares. "I don't know much about him," says Juan Millán, a former Sinaloa state governor. A local reporter who covers the drug trade for Noroeste, a leading Sinaloa newspaper, says he stays away from writing too much about the kingpin. "It isn't worth dying for."
According to the few people who have met him and are willing to talk publicly about it, Mr. Guzmán comes across as down-to-earth and intelligent, despite a third-grade education.
"He's a simple guy, a rancher type, who talks with a country accent, but he's very smart," says José Antonio Ortega, a lawyer who took Mr. Guzmán's deposition in prison shortly before he escaped in 2001. Scheduled to meet Mr. Guzmán at 10 a.m., Mr. Ortega says he was kept waiting at the prison until 10 p.m. He met the capo in a well-appointed prison cell that Mr. Guzmán used as his personal anteroom.
Mr. Guzmán apologized for the 12-hour delay, telling the lawyer that he had had a conjugal visit that day, and had then taken a nap and a shower in order to be ready to "receive [you] with all the courtesy you deserve to be received with," Mr. Ortega recalls.
Mexico's 'Golden Triangle'
One of four brothers, Mr. Guzmán was born in a Sinaloa mountain hamlet of some 40 houses known as La Tuna. La Tuna sits in Badiraguato County, which has the dubious distinction of being the birthplace of most of Mexico's famous drug lords. Badiraguato's location has a lot to do with it: It's the gateway to Mexico's "golden triangle," a remote, mountainous intersection of Sinaloa, Durango and Chihuahua states where opium and marijuana have been grown for generations.
Little is known about Mr. Guzmán's early years. But it is believed that like many of his neighbors, Mr. Guzmán's late father was a gomero, a person who grew poppies for opium and heroin. The family was so poor that when Mr. Guzmán was a baby, his mother turned an old wooden crate used to pack tomatoes into a cradle for him, says a local official who has seen a Guzmán family photograph.
"When he talked about his childhood, he became suspended, as if it were something he wanted to forget," Zulema Hernández, a former policewoman who met Mr. Guzmán while she was serving a stint in prison for robbery, said in an interview with Mexican journalist Julio Scherer for his book on the country's prison system.
Ms. Hernández said Mr. Guzmán was driven by a fear of returning to poverty. "We both shared this dread of having to be poor," she told the journalist. Ms. Hernández went into the drug business herself after her release in 2004, Mexican police say, and was found dead in the trunk of an abandoned car in Mexico City last year. Police don't believe her death was linked to Mr. Guzmán.
Badiraguato, one of Mexico's 200 poorest counties, offers its young few jobs other than the drug trade. In the small town of Santiago de los Caballeros, near the birthplace of legendary drug lords Rafael Caro Quintero and Ernesto Fonseca Carrillo, local peasants, or campesinos, haul freshly cut marijuana on their backs. The smell of marijuana wafts through the air.
The mountain folk of Badiraguato are widely seen as macho, close-mouthed people of tight-knit clans, given to intense loyalty, bloody vendettas and honor killings. "The Omerta of Badiraguato is much deeper than that of Sicily," says Luis Astorga, an expert on the drug trade at Mexico's UNAM University who was born and raised in Sinaloa.
Here, up-and-coming drug lords pick out girls as young as 13, returning to claim them -- usually with the girl and her families' consent -- when they reach 16 or 17. "It's not seen as a negative when a narco comes calling. He can offer a way of life," says a local official.
Many of the fathers and grandfathers of these young capos are buried by the side of Badiraguato's dusty roads or on hillsides with views of the crumbling adobe homes where they were born. They lie in grand marble mausoleums built like mock colonial cathedrals or Greek temples, far more elaborate than the humble houses below.
Judging by photographs or paintings of the dead displayed on the tombs, Badiraguato's native narcos often die young. "Better to live like a rey [king] for six years than as a guey [ox, or fool] for sixty," is a common saying here.
Trying to catch Mr. Guzmán in a place like Badiraguato is a tall order. The county covers 2,300 square miles -- half the size of Connecticut -- with more than 450 tiny towns sprinkled throughout inaccessible mountains. Badiraguato has just 38 cops and five police cars, all stationed in the county seat, leaving every other town with no police at all, just gunmen from the cartels.
Mr. Guzmán's hometown sits a five-hour drive from the county seat down a bumpy dirt road. From June to September, rains make the road nearly impassable. The town itself hasn't changed much, say local officials, except for a bunker-like compound Mr. Guzmán built for his mother and a small church he built for his mother's evangelical Christian group.
Wall Street Journal reporters tried to visit the town along with a local official, who wanted to show off the county's economic development efforts such as building eco-friendly log cabins for tourists. But after two days' delay, the official said a trip was too dangerous. "I was told a visit would be seen as inconvenient," he said. "[Chapo] is not eager for publicity."
Working as an Enforcer
As a young man in Badiraguato in the 1980s, Mr. Guzmán rose through the ranks to become a top lieutenant for Miguel Ángel Félix Gallardo, another Badiraguato native and former cop who had become Mexico's top drug lord, according to analysts and former police officials. Known as El Padrino, or the Godfather, Mr. Félix Gallardo cobbled together a super-cartel dominated by fellow Sinaloans called "The Federation."
But the relative unity imposed by Mr. Félix Gallardo collapsed after his arrest in 1989. His empire, in particular the border crossings that were useful smuggling points, was divided up among his lieutenants. Mr. Guzmán and his close friend Héctor "El Guero" Palma got the border crossing at Mexicali, about 70 miles from Tijuana.
Mr. Guzmán began building an empire of his own. He pioneered the use of underground tunnels across the U.S.-Mexico border to ferry drugs. One such tunnel near San Diego had electricity, air vents and rails to transport the drugs, according to the DEA.
Mr. Guzmán operated an assembly line packing cocaine into chili pepper cans under the brand Comadre, exporting the drugs to the U.S. by rail, his former top accountant, Miguel Angel Segoviano, testified in 1996 at the trial of one of Mr. Guzmán's associates. In return for the drugs, Mr. Guzmán imported into Mexico millions of dollars packed into suitcases flown into the Mexico City airport, where bribed federal officials made sure there were no inspections.
A lot of the money "was given to people who worked for the attorney general's office," testified Mr. Segoviano, who became a DEA protected witness in 1993, and was referring to a period in the early 1990s when there was a quick succession of attorneys general.
All the while, Mr. Guzmán fought other traffickers, notably the Arellano Félix clan that controlled the border at Tijuana. Believed to be Mr. Félix Gallardo's nephews, the clan -- including brothers Ramón, Benjamin and Francisco -- initially went to war to drive Mr. Guzmán and Mr. Palma from the Mexicali border. The feud unleashed almost two decades of unremitting violence.
In one of the earliest incidents, Rafael Clavel, a Venezuelan believed to be working for the Arellano clan, seduced Mr. Palma's wife, Guadalupe Leija, according to former Mexican police officials. They say he took her to San Francisco, where she gave him access to some $7 million of Mr. Palma's money. Mr. Clavel cut off her head, and sent it to Mr. Palma's house in Culiacán in a cooler. Soon after, Mr. Clavel threw Mr. Palma's two small children off a bridge in Venezuela.
Arrested and charged for that crime in Venezuela, Mr. Clavel was murdered in prison. Ms. Leija and her two children are buried in a tomb in Culiacán, adorned with a fresco of the trio. Captured in 1995, Mr. Palma was later extradited to the U.S. and sits in prison for drug trafficking and conspiracy.
The beheading of Ms. Leija was Mexico's first linked to the drug trade. Twenty years later, decapitation has become common practice as the country's warring cartels try to outdo each other in barbarity.
"The killing of El Guero Palma's wife and children shattered the unwritten rules of drug trafficking," says Gregorio Ortega Molina, a Mexico City-based writer who has written a novel about Mexico's first generation of drug capos.
Messrs. Palma and Guzmán sought revenge. In 1992, gunmen for the two men kidnapped and killed nine people, including lawyers and nephews of Mr. Félix Gallardo, the imprisoned drug lord, according to Mexican police reports reviewed by The Wall Street Journal.
Seeking Revenge
The Mexican attorney general's office created a special unit to investigate the executions. But the unit was taken off the case after investigators said they discovered Mr. Guzmán had paid $10 million to the country's top police officials, including the then head of the federal police and the top anti-drug official, according to police reports and interviews with former police officials.
Mexico's Attorney General's Office said it had no comment about allegations of corruption in past administrations.
In early November 1992, Ramón Arellano and four gunmen riddled Mr. Guzmán's car with their AK-47s as he was driving down a main avenue in Guadalajara, then the hub of Mexico's drug trafficking industry.
Associated Press
José Alfonso Sánchez and Miguel Ángel Piedra Gallardo, were arrested this week in Durango.
Days later, El Chapo struck back. A commando team of about 40 gunmen posing as policemen attacked Christine's, a nightclub frequented by American tourists in the resort town of Puerto Vallarta. Five people died in the shootout, but Ramón and Javier Arellano, both in the bathroom when the gunfire started, escaped unharmed.
Six months later, Arellano gunmen killed seven people in a spectacular shootout in the parking lot of Guadalajara's airport where Mr. Guzmán had gone to catch a plane. Among the dead were two of Mr. Guzmán's bodyguards and five bystanders, including Juan Jesús Posadas -- the city's cardinal and one of Mexico's two top prelates.
Mr. Guzmán escaped by crawling and rolling out of the airport parking lot, eventually grabbing a taxi, he later told police. He took refuge in Mexico City, bought false passports and set out with a girlfriend and a business associate for Guatemala while "the problem at the Guadalajara airport was resolved."
The Cardinal's killing shocked Mexico, and forced the Mexican government to make a show of cracking down on drug traffickers. Just 16 days later, Mr. Guzmán was captured by Guatemalan soldiers and handed over to Mexico.
Interviewed by police after his arrest, Mr. Guzmán denied being involved in drug trafficking. He said that "all of my life I've been dedicated to agriculture." He said he was a farmer and businessman, buying and selling corn, sugar, canned goods, and seeds, and dabbling in cock fighting. His income, he said, was about "20,000 new pesos [$5,700] a month without any extras." A gun lover, he told police he favored the Russian-made AK-47 automatic rifle.
A Good Life in Prison
Mr. Guzmán was sentenced to 20 years for conspiracy, bribery, and drug trafficking. He was sent to Puente Grande prison, a maximum security facility, where he continued to run his empire. At the prison, he bribed nearly everyone, including the warden, who is now in jail himself for letting the escape occur under his watch.
Mr. Guzmán's money bought him privilege, according to police officials who investigated his escape. His cell had a television, and he sometimes chose his meals from a menu rather than be served with the rest of the inmates. He had a cellphone to continue directing his drug business, and met often with members of his organization. Other regular visitors were his wife, several lovers and prostitutes. He was given Viagra.
One of his lovers was Ms. Hernández, the policewoman in jail for robbery. After the pair became romantically involved for the first time, Mr. Guzmán sent her a bottle of whiskey and flowers, followed by dozens of love letters, dictated by Mr. Guzmán and written by someone else.
"Zulema, I adore you... [To think] that two people who didn't know each other could meet in a place like this," says one of the letters, as quoted in a book by journalist Mr. Scherer. All were signed with the initials JGL, for Joaquin Guzmán Loera.
El Chapo, together with his longtime associate Mr. Palma, terrorized the jail. Female members of the prison staff, ranging from nurses to cooks, were paid to have sex with the drug lords. One woman who refused was raped, according to documents from the Jalisco state human rights agency viewed by The Wall Street Journal.
Prison guards, too, were offered money to cooperate with the capo. Those who refused were beaten with baseball bats by a group run by Mr. Guzmán known as "the batters," according to the documents, which include first-hand accounts from people working in the prison.
In January 2000, a prison guard named Felipe Leaños filed a complaint with the Jalisco state human rights commission about the abuses at the jail. In the following months, he persuaded four other guards to step forward. The state agency, run by a lawyer named Guadalupe Morfín, tried to get federal officials to intervene in the jail during the course of the year. Mr. Leaños disappeared in May 2007 and is presumed to have been murdered by Mr. Guzmán's men. Ms. Morfín received death threats and had a government-assigned security detail until last year.
Mexico's official story of Mr. Guzmán's escape goes like this: He befriended a prison maintenance worker named Javier Camberos. Mr. Guzmán then told the guards who were on his payroll that Mr. Camberos was going to be smuggling some gold out of the prison in a laundry cart, and to not search the cart. But on the night of Jan. 19, 2001, Mr. Guzmán hid in the cart as Mr. Camberos wheeled him out of the prison. Mr. Camberos is now in prison for helping the escape.
Many Mexicans believe prison officials essentially let Mr. Guzmán walk out. It is difficult to know what really happened, partly because the prison's camera surveillance tapes of that night were erased by prison officials. Jorge Tello, one of Mexico's top security officials at the time, visited the prison on the day of the escape, after having heard rumors the capo might flee. Despite the visit, Mr. Guzmán still managed to escape.
Mr. Tello, who didn't respond to requests for comment, is now President Felipe Calderon's top adviser in the war on drugs.
A tribute to America's war heroes, past and present.
By PEGGY NOONAN
More than most nations, America has been, from its start, a hero-loving place. Maybe part of the reason is that at our founding we were a Protestant nation and not a Catholic one, and so we made "saints" of civil and political figures. George Washington was our first national hero, known everywhere, famous to children. When he died, we had our first true national mourning, with cities and states re-enacting his funeral. There was the genius cluster that surrounded him, and invented us—Jefferson, Adams, Madison, Hamilton. Through much of the 20th century our famous heroes were in sports (Jack Dempsey, Joe Louis, the Babe, Joltin' Joe) the arts (Clark Gable, Robert Frost) business and philanthropy (from Andrew Carnegie to Bill Gates) and religion (Billy Graham). Nobody does fame like America, and they were famous.
Associated Press
Audie Murphy
The category of military hero—warrior—fell off a bit, in part because of the bad reputation of war. Some emerged of heroic size—Gens. Pershing and Patton, Eisenhower and Marshall. But somewhere in the 1960s I think we decided, or the makers of our culture decided, that to celebrate great warriors was to encourage war. And we always have too much of that. So they made a lot of movies depicting soldiers as victims and officers as brutish. This was especially true in the Vietnam era and the years that followed. Maybe a correction was in order: It's good to remember war is hell. But when we removed the warrior, we removed something intensely human, something ancestral and stirring, something celebrated naturally throughout the long history of man. Also it was ungrateful: They put themselves in harm's way for us.
For Memorial Day, then, three warriors, two previously celebrated but not so known now by the young.
Alvin York was born in 1887 into a Tennessee farming family that didn't have much, but nobody else did, so it wasn't so bad. He was the third of 11 children and had an average life for that time and place. Then World War I came. He experienced a crisis of conscience over whether to fight. His mother's Evangelical church tugged him toward more or less pacifist thinking, but he got a draft notice in 1917, joined the Army, went overseas, read and reread his Bible, and concluded that warfare was sometimes justified.
In the battle of the Argonne in October 1918, the allies were attempting to break German lines when York and his men came upon well-hidden machine guns on high ground. As he later put it, "The Germans got us, and they got us right smart . . . and I'm telling you they were shooting straight." American soldiers "just went down like the long grass before the mowing machine at home."
But Cpl. York and his men went behind the German lines, overran a unit, and captured the enemy. Suddenly there was new machine-gun fire from a ridge, and six Americans went down. York was in command, exposed but cool, and he began to shoot. "All I could do was touch the Germans off just as fast as I could. I was sharp shooting. . . . All the time I kept yelling at them to come down. I didn't want to kill any more than I had to." A German officer tried to empty his gun into York while York fired. He failed but York succeeded, the Germans surrendered, and York and his small band marched 132 German prisoners back to the American lines.
His Medal of Honor citation called him fearless, daring and heroic.
Warriors are funny people. They're often naturally peaceable, and often do great good when they return. York went home to Tennessee, married, founded an agricultural institute (it's still operating as an award-winning public high school) and a Bible school. They made a movie about him in 1941, the great Howard Hawks film "Sergeant York." If you are in Manhattan this week, you may walk down York Avenue on the Upper East Side. It was named for him. He died in Nashville in 1964 at 77.
Once, 25 years ago, my father (U.S. Army, replacement troops, Italy, 1945) visited Washington, a town he'd never been to. There was a lot to see: the White House, the Lincoln Memorial. But he just wanted to see one thing, Audie Murphy's grave.
Audie Leon Murphy was born in 1924 or 1926 (more on that in a moment) the sixth of 12 children of a Texas sharecropper. It was all hardscrabble for him: father left, mother died, no education, working in the fields from adolescence on. He was good with a hunting rifle: he said that when he wasn't, his family didn't eat, so yeah, he had to be good. He tried to join the Army after Pearl Harbor, was turned away as underage, came back the next year claiming to be 18 (he was probably 16) and went on to a busy war, seeing action as an infantryman in Sicily, Salerno and Anzio. Then came southern France, where the Germans made the mistake of shooting Audie Murphy's best friend, Lattie Tipton. Murphy wiped out the machine gun crew that did it.
On Jan. 26, 1945, Lt. Murphy was engaged in a battle in which his unit took heavy fire and he was wounded. He ordered his men back. From his Medal of Honor citation: "Behind him . . . one of our tank destroyers received a direct hit and began to burn. Its crew withdrew to the woods. 2d Lt. Murphy continued to direct artillery fire, which killed large numbers of the advancing enemy infantry. With the enemy tanks abreast of his position, 2d Lt. Murphy climbed on the burning tank destroyer, which was in danger of blowing up at any moment, and employed its .50 caliber machine gun against the enemy. He was alone and exposed to German fire from three sides, but his deadly fire killed dozens of Germans and caused their infantry attack to waver. The enemy tanks, losing infantry support, began to fall back."
Murphy returned to Texas a legend. He was also 5-foot-7, having grown two inches while away. He became an actor (44 films, mostly Westerns) and businessman. He died in a plane crash in 1971 and was buried with full honors at Arlington, but he did a warrior-like thing. He asked that the gold leaf normally put on the gravestone of a Medal of Honor recipient not be used. He wanted a plain GI headstone. Some worried this might make his grave harder to find. My father found it, and he was not alone. Audie Murphy's grave is the most visited site at Arlington with the exception of John F. Kennedy's eternal flame.
I thought of these two men the other night after I introduced at a dinner a retired Air Force general named Chuck Boyd. He runs Business Executives for National Security, a group whose members devote time and treasure to helping the government work through various 21st-century challenges. I mentioned that Chuck had been shot down over Vietnam on his 105th mission in April 1966 and was a POW for 2,488 days. He's the only former POW of the era to go on to become a four-star general.
When I said "2,488 days," a number of people in the audience went "Oh!" I heard it up on the podium. They didn't know because he doesn't talk about it, and when asked to, he treats it like nothing, a long night at a bad inn. Warriors always do that. They all deserve the "Oh!"
A tribute to America's war heroes, past and present.
By PEGGY NOONAN
More than most nations, America has been, from its start, a hero-loving place. Maybe part of the reason is that at our founding we were a Protestant nation and not a Catholic one, and so we made "saints" of civil and political figures. George Washington was our first national hero, known everywhere, famous to children. When he died, we had our first true national mourning, with cities and states re-enacting his funeral. There was the genius cluster that surrounded him, and invented us—Jefferson, Adams, Madison, Hamilton. Through much of the 20th century our famous heroes were in sports (Jack Dempsey, Joe Louis, the Babe, Joltin' Joe) the arts (Clark Gable, Robert Frost) business and philanthropy (from Andrew Carnegie to Bill Gates) and religion (Billy Graham). Nobody does fame like America, and they were famous.
The category of military hero—warrior—fell off a bit, in part because of the bad reputation of war. Some emerged of heroic size—Gens. Pershing and Patton, Eisenhower and Marshall. But somewhere in the 1960s I think we decided, or the makers of our culture decided, that to celebrate great warriors was to encourage war. And we always have too much of that. So they made a lot of movies depicting soldiers as victims and officers as brutish. This was especially true in the Vietnam era and the years that followed. Maybe a correction was in order: It's good to remember war is hell. But when we removed the warrior, we removed something intensely human, something ancestral and stirring, something celebrated naturally throughout the long history of man. Also it was ungrateful: They put themselves in harm's way for us.
For Memorial Day, then, three warriors, two previously celebrated but not so known now by the young.
Alvin York was born in 1887 into a Tennessee farming family that didn't have much, but nobody else did, so it wasn't so bad. He was the third of 11 children and had an average life for that time and place. Then World War I came. He experienced a crisis of conscience over whether to fight. His mother's Evangelical church tugged him toward more or less pacifist thinking, but he got a draft notice in 1917, joined the Army, went overseas, read and reread his Bible, and concluded that warfare was sometimes justified.
In the battle of the Argonne in October 1918, the allies were attempting to break German lines when York and his men came upon well-hidden machine guns on high ground. As he later put it, "The Germans got us, and they got us right smart . . . and I'm telling you they were shooting straight." American soldiers "just went down like the long grass before the mowing machine at home."
But Cpl. York and his men went behind the German lines, overran a unit, and captured the enemy. Suddenly there was new machine-gun fire from a ridge, and six Americans went down. York was in command, exposed but cool, and he began to shoot. "All I could do was touch the Germans off just as fast as I could. I was sharp shooting. . . . All the time I kept yelling at them to come down. I didn't want to kill any more than I had to." A German officer tried to empty his gun into York while York fired. He failed but York succeeded, the Germans surrendered, and York and his small band marched 132 German prisoners back to the American lines.
His Medal of Honor citation called him fearless, daring and heroic.
Warriors are funny people. They're often naturally peaceable, and often do great good when they return. York went home to Tennessee, married, founded an agricultural institute (it's still operating as an award-winning public high school) and a Bible school. They made a movie about him in 1941, the great Howard Hawks film "Sergeant York." If you are in Manhattan this week, you may walk down York Avenue on the Upper East Side. It was named for him. He died in Nashville in 1964 at 77.
Once, 25 years ago, my father (U.S. Army, replacement troops, Italy, 1945) visited Washington, a town he'd never been to. There was a lot to see: the White House, the Lincoln Memorial. But he just wanted to see one thing, Audie Murphy's grave.
Audie Leon Murphy was born in 1924 or 1926 (more on that in a moment) the sixth of 12 children of a Texas sharecropper. It was all hardscrabble for him: father left, mother died, no education, working in the fields from adolescence on. He was good with a hunting rifle: he said that when he wasn't, his family didn't eat, so yeah, he had to be good. He tried to join the Army after Pearl Harbor, was turned away as underage, came back the next year claiming to be 18 (he was probably 16) and went on to a busy war, seeing action as an infantryman in Sicily, Salerno and Anzio. Then came southern France, where the Germans made the mistake of shooting Audie Murphy's best friend, Lattie Tipton. Murphy wiped out the machine gun crew that did it.
On Jan. 26, 1945, Lt. Murphy was engaged in a battle in which his unit took heavy fire and he was wounded. He ordered his men back. From his Medal of Honor citation: "Behind him . . . one of our tank destroyers received a direct hit and began to burn. Its crew withdrew to the woods. 2d Lt. Murphy continued to direct artillery fire, which killed large numbers of the advancing enemy infantry. With the enemy tanks abreast of his position, 2d Lt. Murphy climbed on the burning tank destroyer, which was in danger of blowing up at any moment, and employed its .50 caliber machine gun against the enemy. He was alone and exposed to German fire from three sides, but his deadly fire killed dozens of Germans and caused their infantry attack to waver. The enemy tanks, losing infantry support, began to fall back."
Murphy returned to Texas a legend. He was also 5-foot-7, having grown two inches while away. He became an actor (44 films, mostly Westerns) and businessman. He died in a plane crash in 1971 and was buried with full honors at Arlington, but he did a warrior-like thing. He asked that the gold leaf normally put on the gravestone of a Medal of Honor recipient not be used. He wanted a plain GI headstone. Some worried this might make his grave harder to find. My father found it, and he was not alone. Audie Murphy's grave is the most visited site at Arlington with the exception of John F. Kennedy's eternal flame.
I thought of these two men the other night after I introduced at a dinner a retired Air Force general named Chuck Boyd. He runs Business Executives for National Security, a group whose members devote time and treasure to helping the government work through various 21st-century challenges. I mentioned that Chuck had been shot down over Vietnam on his 105th mission in April 1966 and was a POW for 2,488 days. He's the only former POW of the era to go on to become a four-star general.
When I said "2,488 days," a number of people in the audience went "Oh!" I heard it up on the podium. They didn't know because he doesn't talk about it, and when asked to, he treats it like nothing, a long night at a bad inn. Warriors always do that. They all deserve the "Oh!"
When, during the invasion of Iraq, the United States Government issued its famous deck of playing cards with the 52 arch villains of the Iraqi police state, Saddam Hussein's face adorned the Ace of Spades. If the Obama Administration wanted to engage in a similar public relations campaign for the real estate crisis, the top card should be reserved for Alan Greenspan.
Yet in a speech this Tuesday before the National Association of Realtors, Sir Alan “the-bubble-blower” claimed that his low interest rate policies in the early and middle years of this decade had no effect on mortgage rates or real estate prices. As a result, he claims no responsibility for the subprime mortgage crisis. But even current Treasury Secretary Timothy Geithner, who shared interest rate policy responsibility as governor of the New York Fed during the Greenspan regime, recently admitted that overly accommodative policy helped inflate the bubble. So what does Greenspan know that everyone else doesn't?
His primary defense is that mortgage rates were a function of long-term interest rates which were simply not responding to the movement in short term rates, which he did control. While it is true that the flow of capital from foreign creditors with excess dollars did keep long rates low despite rising short rates, this “conundrum” was not the leading factor in the housing bubble. Although rates on thirty-year fixed rate mortgages are based on long-term bonds, by 2005 such loans had become an endangered species. The housing bubble was all about adjustable-rate mortgages with 1-7 year teaser rates primarily based on the Fed funds rate.
The rock bottom teaser rates, permitted by the 1% Fed funds rate, were the primary reason that many home buyers were able to qualify for mortgages they couldn't otherwise afford, and in turn, to bid up home prices to bubble levels. By pushing down the cost of short-term money, the Fed enabled homebuyers to make big bets on rising real estate prices. Without the Fed's help, few borrowers would have “qualified” for these risky mortgages and real estate prices never would have been bid up so high.
Greenspan expresses exasperation now, as he did then, that his careful nudging of interest rates higher by quarter point increments did not translate into corresponding increases in long-term rates. Unfortunately, according to Greenspan, the markets would not cooperate with his wise guidance, and to his dismay, mortgage rates fell despite his best efforts. As they say in Texas, this dog will just not hunt. If the “measured pace” of his quarter point hikes were too slow to produce the desired effect, why didn't Greenspan jack up the pressure? With interest rates far below the official inflation rate for many years during the bubble, he certainly had plenty of room to maneuver. The claim that he was unhappy results of his rate hikes, despite his having done nothing to adjust that policy, is ridiculous.
In addition to his colossal errors on interest rate policy there were many other ways Greenspan blew air into the real estate bubble. One example was what the market called the “Greenspan put.” By creating the perception in word and deed (since proven accurate) that the Fed would backstop any major market or economic declines, lenders became more comfortable making risky loans. In an often quoted 2004 speech, Greenspan went so far as to actively encourage the use of adjustable-rate mortgages and praised home equity extractions for their role in contributing to economic growth. In fact, rather than criticizing homeowners for treating their houses like ATM machines, he often praised the innovative ways in which such homeowners were “managing” their personal balance sheets. Greenspan was as much a proponent of leverage for homeowners on Main Street as he was for bankers on Wall Street.
The bottom line is that Greenspan fathered the housing bubble and now he refuses to acknowledge kinship of his wayward child. His denial of responsibility is an act of stunning bravado, and is a testament to his ability to turn even the simplest of situations into an impenetrable tangle of theories and statistics. The private sector jokers who now hold top dishonors in our pack of economic villains are easily trumped by the Maestro. The fact that Greenspan still has any credibility shows just how little understanding the general public, including Wall Street and the media, actually have about this crisis.
Everyone tries to identify that moment in a downturn when recovery starts. It may be that our recovery started in mid-April, when Jamie Dimon of JPMorgan Chase renounced further government aid for his company. Dimon called the $25 billion in aid his firm had accepted early on "a scarlet letter." Or recovery may have started even earlier, when Rick Santelli of CNBC accused the government of picking "losers" and forcing the rest to fund those choices.
What makes such moments significant is that Dimon and Santelli didn't merely think their protests; they spoke them aloud. Once a few people start speaking the truth publicly, the rest who agree soon begin acknowledging it. The government realizes it has pushed too far. The market notices the government's shift.
Back in the 1930s another character on the national stage spoke out--not just once but for years. His alarms did indeed help turn the economy around. That man was Wendell Willkie.
Willkie didn't set out in life to make it as Franklin Delano Roose-velt's gadfly. He set out to make it, period. In the 1920s, when Willkie was a young lawyer in Indiana and Ohio, the up-and-coming industry was utilities. In New York innovators such as Alfred Lee Loomis and Landon Thorne were trying to update and clean up the industry and supply power to rural America. Dow Jones was creating a utilities index. Willkie joined a new company, Commonwealth & Southern, and became its president. C&S' ambitious goal: to light up the South.
When the stock market crashed in 1929, President Herbert Hoover was quick to blame Wall Street. His successor, FDR, ratcheted up the hostility further, referring to Wall Streeters as "economic royalists" and denigrating the utilities industry specifically. Hoover had raised taxes, but FDR raised them yet again, targeting business directly with creepy levies such as the undistributed profits tax. Shortly after his inauguration in 1933, Roosevelt established a direct competitor to C&S: the Tennessee Valley Authority ( TVC - news - people ). The TVA's premise was radical--reorganize the U.S. economy around river basins, generating hydropower through the public sector. C&S' assigned interlocutor at the TVA was David Lilienthal, a lawyer, like Willkie, from Indiana.
Willkie and Lilienthal met over a dark wood table at Washington's Cosmos Club. Willkie wanted a deal and thought he could get one out of the younger Hoosier. If Lilienthal and he agreed to trade power, Willkie would buy his company time. The TVA wouldn't last forever, Willkie's thinking went; it was too ambitious and expensive. Lilienthal had to be reasonable--after all, the next Congress could refuse to fund him. In public Willkie would be as conciliatory as possible. Most executives in the U.S. adopted a similarly friendly posture toward the New Deal, the attitude being to give the new Administration time.
But as years passed Willkie realized his cooperative stance was costing C&S' shareholders. Lilienthal used tax advantages and subsidies ruthlessly to achieve his boss' grand goal: to expand public-sector utilities. C&S lost in court against the TVA, then won, then lost again. Meanwhile, the TVA expanded in the Tennessee Valley. FDR signed legislation so restrictive to the private sector that a clause within it was referred to as the "death sentence." The utilities industry, which should have been a growth leader, paid a terrible price for Washington's attacks. Between early 1932 and early 1936 the DJIA rose 88%--the Roosevelt Rally. Utility stocks barely budged during the same time frame.
Obama-Intensity Adoration
In a radio debate in January 1938, five years into the New Deal, Willkie found his Dimon moment. Roosevelt's casual epithets of "economic royalists" and "banker control" had actually chilled investment, Willkie said. The New Dealers' high capital gains and undistributed profits taxes were retarding American firms' recovery. The government was making the Depression worse by getting in the way. "For several years now," Willkie warned, "we have been listening to a bedtime story, telling us that the men who hold office in Washington are, by their very positions, endowed with a special virtue."
Hearing Willkie, the country snapped awake. Perhaps the New Deal had all been "a bedtime story." Maybe citizens should have spoken out in 1933, not 1938? The Saturday Evening Post dubbed Willkie "The Man Who Talked Back." Other businessmen from other companies and industries soon publicized their own concerns.
Citizens began to see the rumpled utilities executive as a potential GOP candidate. In 1936 Roosevelt had won his record landslide, but in the 1938 midterm election the GOP reclaimed some House and Senate seats--not enough to form a majority, but enough to place a thoughtful question mark over Democratic certitude. The market rallied. Journalists developed an Obama-intensity crush on Willkie that lasted for years. The most egregious of their tributes was an epic poem by Muriel Rukeyser, embarrassing both in its length (330 pp.) and bathos: "Wounded he lay. And for good reason. His wounds our wounds."
When Willkie finally ran for President in 1940, he did not win, but he did aggregate enough support to deal a blow to Democratic radicalism. Roosevelt was not over, but the New Deal was. The point is not that those who talk back are perfect. The canny Dimon probably isn't. Willkie sure wasn't. The takeaway is that daring to talk back is worthwhile--especially when you do it early.
Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations; Paul Johnson, eminent British historian and author; Lee Kuan Yew, minister mentor of Singapore; and David Malpass, global economist, president of Encima Global LLC, rotate in writing this column. To see past Current Events columns, visit our Web site at www.forbes.com/currentevents.
While the nation's lenders ran amok during the boom, Andy Beal hoarded his money. Now he's cleaning up--with scant help from Uncle Sam.
Standing outside the glass-domed headquarters of his Plano, Texas, bank in March, D. Andrew Beal presses a cellphone to his ear. He's discussing a deal to buy mortgage securities. In just a few minutes, the deal's done: His Beal Bank will buy $15 million of face value for $5 million. A few hours earlier he reviewed details on a $500 million loan his bank is making to a company heading into bankruptcy--the biggest he's ever done. A few floors above, workers are bent over computer screens preparing bids for chunks of $600 million in assets dumped by two imploded financial firms. In the last 15 months, Beal has purchased $800 million of loans from failed banks, probably more than anyone else.
Andy Beal, a 56-year-old, poker-playing college dropout, is a one-man toxic-asset eater--without a shred of government assistance. Beal plays his cards patiently. For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank's assets because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about "stupid loans." His odd behavior puzzled regulators, credit agencies and even his own board. They wondered why he was seemingly shutting the bank down, resisting the huge profits the nation's big banks were making. One director asked him: "Are we a dinosaur?"
Now, while many of those banks struggle to dig out from under a mountain of bad debt, Beal is acquiring assets. He is buying bonds backed by commercial planes, IOUs to power plants in the South, a mortgage on an office building in Ohio, debt backed by a Houston refinery and home loans from Alaska to Florida. In the last 15 months Beal has put $5 billion to work, tripling Beal Bank's assets to $7 billion, while such banks as Citigroup ( C - news - people ) and Morgan Stanley ( MS - news - people ) shrink and gobble up billions in taxpayer bailouts.
Beal has barely got a dime from the feds. A self-described "libertarian kind of guy," Beal believes the government helped create the credit crisis. Now he finds it "crazy" that bankers who acted irresponsibly are getting money and he's not. But he wants to exploit their recklessness to amass his own fortune. "This is the opportunity of my lifetime," says Beal. "We are going to be a $30 billion bank without any help from the government." (A slight overstatement: He is quick to say he relies on federal deposit insurance.) Not much next to the trillion-dollar balance sheets of the nation's troubled banks, but the lesson here might be revealed in the fact that this billionaire is not playing with other people's money--he owns 100% of the bank and is acting accordingly.
It's hard to imagine Beal fitting in at a bankers' convention. He walked into the Las Vegas Bellagio in 2001 and challenged the world's best poker players to games with $2 million pots--the highest stakes ever. Donning large sunglasses and earphones, Beal held his own against the poker stars, once winning $11 million in a single day, although he shrugs that he lost more than he won. At the track he'll drive one of his nine race cars (costing as much as $100,000 each) at 150 mph. On city streets he cruises in a huge Ford Excursion, the vehicle that has made him feel safe since a drunk driver punctured his lungs in 2000. When Ford Motor ( F - news - people ) discontinued the Excursion a few years ago, Beal bought an extra one for storage.
A math whiz who left Michigan State to dabble in real estate, Beal has offered a $100,000 prize to anyone who can solve a number-theory puzzle. Beal launched a rocket company that built the largest liquid-fuel engine since the Apollo missions. After spending $200 million over four years he shut the venture down, saying it was impossible to compete with NASA's subsidies.
In the last 15 years Beal says he has bought only one stock. If he ever thinks of investing in hedge funds or private equity, he says, "Just shoot me." The blunt-spoken Beal shuns publicity and is uncomfortable in the public eye. He concedes he can seem "unprofessional." After 20 years in the business he attended his first bankers' conference last year.
The son of a mechanical engineer, Beal grew up in Lansing, Mich. He ended up in Texas after buying an apartment complex in Waco. He founded Beal Bank in Texas in 1988, opening the first branch next to a Wendy's ( WEN - news - people ), and started purchasing distressed real estate loans from failing banks. Years later he also opened a bank in Las Vegas. Beal Bank has long been a unique animal, mostly buying loans in the secondary market instead of originating them. It was a successful model: In 2000 American Banker declared Beal Bank the most profitable bank in the nation as measured by its five-year return on equity of 50%.
By September 2004 Beal Bank's assets had climbed to $7.7 billion. Then Beal stopped buying, letting his loans run off. By September 2007 assets had shriveled to $2.9 billion, one-fifth of which was cold cash. He was worried that consumers had taken on too much debt and money was being lent to companies for next to nothing. "Every deal done since 2004 is just stupid," Beal says.
He began by pulling back from home loans--even those guaranteed by Fannie Mae ( FNM - news - people ) and Freddie Mac ( FRE - news - people ). Beal thought the two quasi-government agencies were over-leveraged. When staffers mentioned their guarantees in deal presentations he would fire back that these guarantees were "worthless."
Outsiders thought it was Beal who didn't get it. Despite its aversion to credit then, the bank occasionally had to buy mortgages to meet federal low-income-lending requirements. Jonathan Goodman, then head of loan purchases, recalls salesmen from Countrywide laughing at him on the phone when he refused to buy iffy condo paper backed by the two agencies. "Countrywide, Bank of America ( BAC - news - people ), Washington Mutual ... every single [mortgage seller] thought we were insane," Goodman says. "They didn't know why we cared. They thought Fannie and Freddie guarantees were as good as Treasuries."
Beal also stopped making commercial loans. "If I see another office condo in Las Vegas or Phoenix, I'm going to throw up," he said at the time. He started selling, too. At a price of 115 cents on the dollar he unloaded a $75 million pool of loans that had been extended to Kmart, exercise chain 24 Hour Fitness and Regal Cinemas. That translated into a yield for the buyer of a mere 1.35 percentage points over Treasuries. "They were great loans at 85 cents," says Beal, referring to the price he had paid for them years earlier. "They're stupid at 115."
With fewer assets, he began laying off staff, cutting down to 200 people from a peak of 400. "Escorting all those people out the door was awful, the worst moments of my life," says Jacob Cherner, who oversees Beal's lending and debt purchases. Half of the 270,000-square-foot polished wood and Brazilian granite headquarters went dark. (Beal hastens to add he bought the building from an oil company desperate to move only because it was selling at a discount.) He hired agents to rent out the space.
Beal started coming to work at 10:30 and leaving at 2:30. He challenged colleagues to backgammon games and took hour-long lunches, complaining of being "bored stiff," recalls one frequent meal companion, real estate investor Steven Houghton. Then Beal would head home to walk a nearby creek with the youngest of his six children. He took up car racing, too. "I thought it would end in six months, and sanity would return," he says. "If I knew it would last nearly four years I would have thought of something else to do."
In late 2006 he sold $74 million of preferred stock although he had no immediate use for the proceeds. He says he couldn't resist the "stupidly mispriced" terms--as low as Libor plus 1.7 percentage points for 30 years. He wanted as much money available when the boom turned to bust. With the extra money the bank could pay off nearly all its depositors with capital on hand--nearly unheard of in the history of banking.
Then came a shocker: Amid one of the most reckless lending sprees in history, regulators focused on the one bank that refused to play along. Beal's moves confused and worried them, and so they began to probe him with questions. "What are you doing?" he recalls them asking. "You're shrinking yet you're raising capital?"
Says Beal about the scrutiny, "I just didn't fit into any box." One regulator, the former head of the Texas Savings & Loan Department, Charles Danny Payne, says, "I was skeptical at first, but I've gained a lot of confidence over the years," adding that Beal has an "uncanny ability to sniff out deals."
Next, the credit rating agencies started pestering him about his dwindling loan portfolio. They never downgraded him but scolded him for seeming not to have a "sustainable" business model. This while their colleagues were signing off on $32 billion of bum collateralized debt obligations issued by Merrill Lynch.
Then came the summer of 2007, and Wall Street's securitization machine began to break down. Prices on pools of mortgages were falling. Beal was tempted but insisted on inspecting individual loan files. Wall Street refused. Still, he knew his time was coming. To prepare bids he locked himself in his office to write a computer program with 50 variables (now 250), ranging from home price changes by neighborhood to interest rates to origination dates.
By 2008, Wall Street started letting Beal peel off individual loans. He bought a bit, then in earnest when Bear Stearns collapsed. He concentrated first on whole single family residential loans, buying $1.8 billion of those. He has hired 160 people to service residential mortgages, arranging the employees in rows of cubicles one floor below his office. His payroll has more than doubled to 450.
Lately he's been spending on a broad range of assets. Beal just bought a $465 million loan to bankrupt chemical maker Lyondell. He's extended tens of millions to utilities, manufacturers, convenience stores, hotels, casinos--"everything you can imagine, in every state," he says. Many of those assets have come from 15 failed banks, including First Integrity in Minnesota, Arkansas National and First Priority in Florida. Since November he's bought $2 billion (face value) of home loans bundled into securities, too. But he says he's still just picking off loans with a "rifle" not a "shotgun," buying only 3% of what lands on his desk while waiting for the financial system to further "unravel."
To fund his purchases Beal has relied on brokered deposits, known as hot money in the banking business. A year ago Beal Bank had $49 million, but by dangling relatively generous rates on certificates of deposit (0.88% for a six-month CD) brokers have since funneled $1.2 billion into the bank. To replace the brokered funds Beal is building 28 branches from Miami to Seattle, up from 7 at the end of last year.
He's getting scant help from the government. The Troubled Asset Relief Program does not accommodate a guy like Beal because the maximum amount available is 3% of 2008 assets. Had Beal leveraged up his capital to $25 billion and made toxic loans in the last few years, he would now qualify for $750 million. As things stand he can get only $150 million, hardly worth the trouble given the strings attached.
Beal is amply using the Federal Deposit Insurance Corp. to attract small deposits; he isn't approved for the wholesale version of deposit insurance, which goes by the name of Temporary Liquidity Guarantee Program. Launched in October, this federal giveaway has the government backing senior unsecured bank debt. Banks that got too big, like Citigroup, have flocked to the cheap funding, issuing $200 billion. The FDIC's stated purpose is to "encourage liquidity in the banking system," and Beal would love the extra capital, but FDIC staffers have told him, without providing details, that the program was not designed for him. "We must be the only bank that has tripled in size in the last eight months, but we aren't eligible for nothing," says Beal. "The crazy thing is guys who weren't real responsible are eligible."
He thinks the government is going to be "disappointed" by its various programs to revive lending. He says Treasury Secretary Timothy Geithner's new plan to guarantee loans to buyers of toxic assets won't lead to many sales because the problem isn't liquidity but price. They are not low enough. Half the country's banks--4,000 in all--would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.
"Banks are on a prayer mission that somehow prices will come back and they won't have to face reality," Beal says. And that reality, according to Beal, is going to get a lot worse. "Unemployment is going over 10%, commercial real estate hasn't even begun collapsing and corporate credit defaults are just getting started," he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.
As for the cause of this mess, Beal points a finger at the government for giving its imprimatur to just a handful of credit rating agencies, then insisting that money market and pension funds buy only paper with top grades. He also blames government for luring people into debt by backing everything from bank deposits to Fannie and Freddie to student loans.
A sign in Beal's office reads: "Often wrong, but seldom in doubt." His tenacity led him on a six-year seemingly quixotic quest suing his own regulator, the FDIC, over thousands of terrible subprime loans Beal bought after it seized a failed Pritzker-family-owned bank in 2001. Beal claimed the FDIC made loans to unqualified buyers that did not meet the representations the agency made to him. In December the FDIC settled by agreeing to cough up $90 million.
Now Beal is taking on the IRS. Earlier this year he concluded a trial over big loss deductions he took on nonperforming Chinese loans. He sold them for $9 million less than he paid but used a loophole later closed by Congress to shelter 90% of the $1.2 billion of income he personally earned from the bank between 2002 and 2004. The government disallowed the deductions and was not amused when Beal sued to recover them and tens of millions in penalties imposed. Beal says he was deferring taxable income that he recognized in 2007 and was merely following the tax code. "I am a good guy made to look like a bad guy for doing what every taxpayer does--appropriately use the law to minimize my taxes," he says.
A decision is expected this summer, but don't expect a chastened Beal if he loses. After New York state's highest court ruled against him in a contract dispute in 2007, Beal took out a full-page ad in The Wall Street Journal asking: "When is a contract NOT enforceable according to its clear terms? When it is in the state of New York."
Beal is putting in full days now, much of it spent reviewing loans in his office, which overlooks a construction pit for a new garage to accommodate his expanding staff. One March afternoon a credit officer walks in with a report on a possible $224 million loan at a fat 12% interest rate that an airline needs to buy eight Boeing 737s. Beal peppers him with questions: How much are other airlines ordering? How many similar planes are parked in storage? The staffer mentions that the airline was balking at paying the bank a 1% fee just to get it to formally review the loan. Beal sends the staffer away with these instructions: no fee, no loan.
Next, a guy in charge of bidding for failed bank assets pops his head in the door to update Beal on loans he's recently bought for as low as four cents on the dollar. "[FDIC Chairman] Sheila Bair doesn't like the prices," says Beal, but "you need a margin of error." Then an analyst walks in with details on a $130 million loan to a battery maker for sale in the secondary market. Beal fires off a half-dozen questions probing some vague language in the original loan contract about collateral in case of default, and his face curls in disgust. "This had to be originated in the stupid times," he says, before ruling against making an offer. Then there's something worth a bite. A loan to a power producer was selling at par a year ago. Today a $25 million piece of it is offered at 72 cents, and Beal is buying.
"All these guys were stumbling over each other 18 months ago to pay over par," he says. "Now they can't sell fast enough at a discount. Why do people not do the great deals and do all the stupid ones? It's crazy."
Many in the United States fear that offshoring research and development to countries like China and India may cause them to overtake the West in innovation. Columbia University's Amar Bhidé argues that those fears are mostly unfounded, because scientific knowledge can easily cross national borders — and bring value to the entire world.
The world is a long way from being flat.
China and India aren’t anywhere close to catching up with the United States in their capacity to develop and use technological innovations.
Starting afresh may allow China and India to leapfrog ahead in some fields, in building advanced mobile phone networks, for example. But excelling in the overall innovation game requires a great and diverse team which, history suggests, takes a very long time to build.
Consider Japan, which began to “enter the world” after the
Of the many activities included in the innovation game, only some are performed well in remote, low-cost locations.
Boshin War of 1868. In the subsequent Meiji Restoration, the country abolished its feudal system and instituted a Western legal system and a quasi-parliamentary constitutional government.
In a few decades, Japan had modernized its industry, its military and its educational system. Today Japan is a highly developed economy and makes important contributions to advancing the technological frontier.
But nearly a century and a half after Japan started modernizing, its overall capacity to develop and use innovations — as evidenced by average productivity — remains behind that of the United States.
Similarly, Korea and Taiwan started industrializing (as it happens, under Japanese rule) about a century ago and enjoyed miraculous rates of growth after the 1960s.
In several sectors of the electronics industry, Korean and Taiwanese companies are technological leaders. Yet their overall productivity suggests they have less capacity to develop and use innovations than does Japan.
Is it likely then that within any reader’s lifetime China and India will attain the parity with the United States that has eluded Japan, Korea and Taiwan?
Nearly a century and a half after Japan started modernizing, its overall capacity to develop and use innovations remains behind that of the United States.
The fear of offshoring of innovation is similarly exaggerated. Don’t expect to hear a giant sucking sound anytime soon. The massive relocation of innovation appears highly unlikely.
The fact that U.S. companies have started R&D centers abroad that do high-level research doesn’t mean that all lower-level development know-how will quickly follow.
Of the many activities included in the innovation game, only some are performed well in remote, low-cost locations. Many mid-level activities, for instance, are best conducted close to potential customers.
Any catch-up, even if it takes place gradually and in the normal course of development, will to some degree reduce the U.S. “lead.” Furthermore, the global influence of techno-nationalism could accelerate this process.
As alarmists in the United States don’t fail to remind us, governments in “emerging” countries such as China and India — also in the thrall of techno-nationalist thinking — are making a determined effort to leap ahead in cutting-edge science and technology.
I am skeptical that these efforts are going to do any more good for China’s and India’s economy than did similar efforts in Europe and Japan in the 1970s and 1980s.
But put aside the issue of whether investing in cutting-edge research represents a good use of Chinese and Indian resources. Does whatever erosion of U.S. primacy in developing high-level know-how that this might cause really threaten U.S. prosperity? Should the U.S. government respond in kind by putting even more money into research?
Princeton economist Paul Krugman, in a 1994 Foreign Affairs essay, decried a “dangerous obsession” with “national competitiveness.”
An increase in the world’s supply of high-level know-how provides more raw material for mid- and ground-level innovations that increase living standards in the United States.
The tendency to think that “the United States and Japan are competitors in the same sense that Coca-Cola competes with Pepsi,” Krugman pointed out, is widespread. He quoted then-President Clinton’s claim that “each nation is like a big corporation competing in the global marketplace.”
This premise, which is at the heart of techno-nationalism, Krugman persuasively argues, is “flatly, completely and demonstrably wrong.” Although “competitive problems could arise in principle, as a practical, empirical matter, the major nations of the world are not to any significant degree in economic competition with each other.”
The techno-nationalist claim that U.S. prosperity requires that the country “maintain its scientific and technological lead” is particularly dubious. The argument fails to recognize that the development of scientific knowledge or cutting-edge technology is not a zero-sum competition.
The results of scientific research are available at no charge to anyone anywhere in the world. Most arguments for the public funding of scientific research are in fact based on the unwillingness of private investors to undertake research that cannot yield a profit.
Cutting-edge technology (as opposed to scientific research) has commercial value because it can be patented — but patent owners generally don’t charge higher fees to foreign licensors.
The then-tiny Japanese company Sony was one of the first licensors of Bell Lab’s transistor patent. It paid $50,000 for a license (after obtaining special permission from the Japanese Ministry of Finance) that started it on the road to becoming a household name in consumer electronics.
The United States has more than just great scientists and research labs. It also hosts an innovation game with many players who can exploit high-level breakthroughs — regardless of where they originate.
If patent holders choose to exploit their invention on their own (i.e., not grant licenses to anyone), this does not mean that the country of origin secures most of the benefit at the expense of other countries.
Suppose IBM chooses to exploit internally, rather than freely license, a breakthrough from its China Research Laboratory (employing 150 research staff in Beijing).
This does not help China and hurt everyone else. Rather, the benefits go to IBM’s stockholders, to employees who make or market the product that embodies the invention and — above all — to customers, who secure the lion’s share of the benefit from most innovations.
These stockholders, employees and customers, who number in the tens of millions, are located all over the world.
In a world where breakthrough ideas easily cross national borders, the origin of ideas is inconsequential. Contrary to Thomas Friedman’s assertion, it does not matter that Google’s search algorithm was invented in California.
After all, a Briton invented the protocols of the World Wide Web in a lab in Switzerland. A Swede and a Dane in Tallinn, Estonia, started Skype, the leading provider of peer-to-peer Internet telephony. How did the foreign origins of these innovations harm the U.S. economy?
The United States has more than just great scientists and research labs: It also hosts an innovation game with many players who can exploit high-level breakthroughs regardless of where they originate.
Cutting-edge technology (as opposed to scientific research) has commercial value because it can be patented — but patent owners generally don’t charge higher fees to foreign licensors.
Therefore, the erosion of the U.S. lead in cutting-edge research isn’t just harmless: An increase in the world’s supply of high-level know-how provides more raw material for mid- and ground-level innovations that increased living standards in the United States.
The U.S. technological lead narrowed after World War II as Western Europe and Japan rebuilt their economies and research capabilities.
This led not to a decrease, but to an increase in U.S. prosperity. The United States likely enjoys a higher standard of living because Taiwan and Korea have started contributing to the world’s supply of scientific and technological knowledge.
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