March 12, 2011
By CLAIRE CAIN MILLER
SEATTLE
RAISE your hand if you remember when Starbucks seemed cool.
Anyone?
Think back. To before the planet groaned with 17,000 Starbucks shops. Before the pumpkin spice lattes and the Ciao Amore CDs. Before the Strawberries & Crème Frappuccino ice cream, the Starbucks cream liqueur, the Pinkberry-inspired Sorbetto.
In short, to before Howard D. Schultz and his trenta-size ambition turned a few coffeehouses here into the vast corporate Empire of the Bean.
The world has often seemed three espressos behind Mr. Schultz — which is why the low-key guy sitting in his office here doesn’t quite seem like Howard Schultz.
Did he just say “but”? As in, “We have won in many ways, but ...”? Was that a “we” instead of an “I”? A note of humility?
Yes, this is Howard Schultz: the man who willed Starbucks onto so many street corners — and then, for a moment, looked as if he might lose it all.
Not even Mr. Schultz could have predicted how Starbucks would change our culture when its first shop opened here, in Pike Place Market, on March 30, 1971. Like it or not, Starbucks became, for many of us, what we talk about when we talk about coffee. It changed how we drink it (on a sofa, with Wi-Fi, or on the subway), how we order it (“for here, grande, two-pump vanilla, skinny extra hot latte”) and what we are willing to pay for it ($4.30 for the aforementioned in Manhattan).
But during the depths of the recession, Starbucks nearly drowned in its caramel macchiato. After decades of breakneck expansion under Mr. Schultz, tight-fisted consumers abandoned it. The company’s sales and share price sank so low that insiders worried Starbucks might become a takeover target.
So, after an eight-year hiatus, an alarmed Mr. Schultz returned as chief executive in January 2008. He shut 900 shops, mostly in the United States, drastically cut costs and put the company back on course.
Friends and colleagues say this hellish experience left Mr. Schultz a changed man. Starbucks, these people say, is no longer “The Howard Schultz Show.” The adjective that many use to characterize his new self is “humble” — a word that few would have applied to him before.
“Everything Starbucks did in the past, more or less, had worked,” Mr. Schultz said in an interview in January at the company’s headquarters, with a view of Puget Sound south of downtown Seattle. “Every store we opened was successful, every city, every country.”
He continued: “Growth had a life of its own — and that’s O.K., when you’re hitting the cover off the ball every time, but at some point, nothing lasts forever.”
One thing hasn’t changed: the man dreams big. In that same interview, Mr. Schultz spoke of expanding into still more products and in markets like China. He is pushing, of all things, a brand of instant coffee. The words “Starbucks Coffee” were just removed from the company’s green mermaid logo because he wants to waltz his brand up and down the grocery aisles. On Thursday, he announced that the company had struck a deal with Green Mountain Coffee Roasters to distribute Starbucks coffee and teas for Keurig single-serving systems. Shares of Starbucks jumped nearly 10 percent on the news, reaching their highest level since 2006. The stock closed at $36.56 on Friday.
Mr. Schultz and his colleagues say Starbucks will keep its feet on the ground this time, but some outsiders have doubts. Detractors say Starbucks long ago ceded its role as a gourmet tastemaker to become a “billions-and-billions served” chain like McDonald’s. Starbucks — “Charbucks,” to those who complain that its heavily roasted coffee tastes burned — will never rekindle the old romance, these people say.
“Has anybody said they came back because people love the coffee again?” asks Bryant Simon, a history professor at Temple University and author of “Everything but the Coffee: Learning About America From Starbucks.”
“They came back because they’re remaking themselves as a brand that competes on value, largely — a brand that’s everywhere, easily accessible, predictable,” Mr. Simon says.
HOWARD SCHULTZ, now 57, is a tall, sinewy man with a toothy grin and a silky sales pitch. He rarely sticks to script, preferring to speak off the cuff, whatever his audience. In conversations, he leans in, locks eyes and gives the impression that, right now, there is no one else in the world he would rather be talking to. When he speaks of “soul” and “authenticity” and “love,” you could almost forget that he runs a multibillion-dollar business that has become an uneasy symbol of globalization. Or that the British actor Rupert Everett once likened Starbucks to a metastasizing cancer.
The story of Mr. Schultz’s life and career has been told many times, not least by Mr. Schultz. (His second book, “Onward: How Starbucks Fought for Its Life Without Losing Its Soul,” is to be published on March 29.) But some highlights bear repeating:
He grew up poor in the Bay View housing projects in Canarsie, Brooklyn, received a football scholarship to Northern Michigan University and, after a variety of jobs, joined the fledging Starbucks in 1982, as head of marketing. Inspired by Italy’s coffee culture, he left Starbucks and opened his own coffee shop. Then, in 1987, he bought Starbucks, which at the time had all of six shops. By 1995, Starbucks had 677 shops. By 2000, it had 3,501, and that year Mr. Schultz stepped aside as C.E.O.
And so it went for Starbucks, one success after another, until the recession hit and exposed the company’s overreach to the world.
In December 2007, Mr. Schultz was worried that the Starbucks brand was losing its luster, and he and the board decided that in the new year, they would push aside Jim Donald and announce that Mr. Schultz would return as C.E.O. That month, Mr. Schultz, his wife, Sheri, and their two children flew to Hawaii for their annual getaway.
But on the beach in Kona, he just couldn’t relax. He kept checking the company’s daily sales figures and was horrified to see that they were falling by double digits.
Also in Hawaii then was his friend Michael Dell, who had recently returned to run Dell Inc. On a long bicycle ride along the coast, Mr. Dell told Mr. Schultz that when he returned to Dell, he wrote what he called a “transformational agenda.” Mr. Schultz then created his own plan for Starbucks.
His goals were to fix troubled stores, to rekindle an emotional attachment with customers and to make longer-term changes like reorganizing executives and revamping the supply chain.
He returned to Seattle, handed copies of his plan to the company’s senior executives and posed the big question: Are you in, or are you out? Eight of those top 10 executives have since departed.
“What the company needed then was what he used to be to us — the innovation, the refusal to not be a champion,” says Troy Alstead, the chief financial officer. “A lot of people were questioning, in that span before he came back, ‘Were we done?’ And Howard came back, and it wasn’t even a question anymore.”
MR. SCHULTZ usually rises at 4 a.m., without an alarm, downs a Starbucks Sumatran coffee at home, followed by a short double latte or espresso macchiato from one of two Starbucks stores he visits on his way to work. He arrives in his office by 6:30.
Friends and colleagues agree that he is as fanatical as ever about Starbucks. Millard Drexler, the chief executive of J. Crew, recently e-mailed Mr. Schultz to complain that the coffee lids at a Starbucks on Astor Place in Manhattan kept spilling coffee on his shirt. Mr. Schultz’s reply: “On it.”
Mr. Drexler, who has a habit of e-mailing C.E.O.’s with complaints, says: “I can give you many more examples when they say, ‘I’ll send this to a research department or a gatekeeper.’ ” But, he says of Starbucks, “to have that kind of quality control they have around the world is pretty extraordinary.”
It was on such a morning in early 2008 that Mr. Schultz was convinced he had a product that would re-energize the company’s tired sales. It was called Sorbetto after the Italian for “sorbet,” and the drink was a twist on Pinkberry, the frozen yogurt chain in which Mr. Schultz is an investor.
Mr. Schultz had flown to Italy to taste the ingredients of his new product and thought he had the next Frappuccino. By that summer, 300 Starbucks locations in California were bathed in pink to promote the new drink. Starbucks had shipped in ingredients from Italy, and Mr. Schultz had primed investors.
But customers didn’t like the sugary concoction. And neither did Starbucks baristas, who had to spend an hour and a half cleaning the Sorbetto machines at the end of their shifts. A few months later, Mr. Schultz abandoned Sorbetto.
“Sorbetto, we did too quickly, and that was my fault,” Mr. Schultz says.
The headlong introduction was a mistake, but it was also classic Schultz.
“He likes things moving quickly, he likes people to be decisive, he’s got this energy level, this need for driving and for winning, and I think at times it’s hard for some people to keep up,” says Michelle Gass, the president of Seattle’s Best Coffee, which Starbucks owns. After his missteps, Ms. Gass says, Mr. Schultz has become more disciplined and a better listener.
Mr. Schultz concedes that he can no longer run Starbucks through the Cult of Howard. And he readily acknowledges that he badly misread the economy and underestimated the extent to which his customers would pull back during the recession.
At the time, he says, he had a hard time accepting that Starbucks would become a poster child for excess.
After his return, he halted new store openings and, with a P.R. flourish, closed every Starbucks in the nation for three hours to retrain baristas. The chain ran its biggest ad campaign ever, emphasizing the quality and freshness of its coffee. It ordered baristas to dump brewed coffee after 30 minutes.
But growth in same-store sales dipped below zero for the first time ever, and the company’s share price kept falling. It was a new feeling for Mr. Schultz, like the A student who breezes into college and then gets C’s.
Executives concluded that Starbucks had to close 200 American shops. The board suggested 600. Executives said that if sales and the economy got worse, they would also cut $400 million in costs. The board said no, let’s start cutting costs immediately, while closing locations. Starbucks ultimately closed 900 locations worldwide and cut $580 million in costs. As the decline in same-store sales neared 10 percent, board members asked executives to model what would happen if the sales slide hit 20 percent — which once would have been unthinkable.
“Nobody knew where the bottom was,” recalls James G. Shennan Jr., a venture capitalist who has been on the company’s board since 1990. “The general agreement around the table was we better have the doomsday plan.”
In December 2008, almost a year after he returned as C.E.O., Mr. Schultz flew to New York on the company jet. He and his team were scheduled to meet with analysts from Wall Street, where Mr. Schultz, once a darling, was now being doubted as never before.
On the plane, he reviewed the grim quarterly numbers: Profits were underwhelming, and holiday sales looked dreadful. Just before the meeting, the company’s chief financial officer, Pete Bocian, resigned.
Mr. Schultz reread the script for the presentation — and didn’t like what he saw. He worried that the stock price might drop so low that someone would swoop in and buy the company.
He summoned his executives to his Fifth Avenue apartment. Late into the night, around the dining room table, they revised the presentation.
The next day, as the executives rehearsed, Mr. Schultz kept interrupting. Vivek Varma, who had recently joined Starbucks as head of public affairs, told him that he should leave.
No one could remember anyone talking like that to Mr. Schultz. But he left. The next day, he and the other executives painted a somber picture for analysts and laid out the recovery plans. Rather than plunge, the company’s share price rose 20 cents that day.
Over the next year, Starbucks made much deeper and more difficult changes than Mr. Schultz had originally envisioned. By April 2009, same-store sales, though still down from a year earlier, were finally rising. By the holidays, they had turned positive.
INSTANT coffee: the very words leave a bad taste in many people’s mouths. But Starbucks has been developing instant coffee in earnest since 2006. Mr. Schultz says his industry considers instant a “death category.” It is, however, a $20 billion one.
Before he returned, Mr. Schultz complained that if Apple could develop the iPod in less than a year, Starbucks could surely develop an instant coffee in that time. Finally, in January 2009, the new product, Via, was scheduled for a full-scale introduction.
But there was a problem: market research was showing that skeptical customers needed a lesson about instant coffee. Some executives worried that a big rollout might flop. Ms. Gass and a few others told Mr. Schultz that Starbucks should delay Via and introduce it in two cities before going national.
“That was hard for him,” Ms. Gass says. But rather than overrule his executives, as he might have in the past, Mr. Schultz agreed. It turned out to be the right decision. After testing Via in Seattle and Chicago, Starbucks rewrote the plan for a nationwide introduction. For instance, instead of just giving away free samples, which customers forgot in the bottom of their briefcases, purses and backpacks, it prepared Via in the stores and gave customers a blind taste test.
In 2010, sales of Via were over $200 million. The instant coffee is now also sold in grocery stores and in Britain, Canada, Japan and the Philippines.
The methodical introduction of Via offered a sharp contrast to the old Howard Schultz whose gut told him — wrongly — that Sorbetto would be a winner. But he has also gone so far as to embrace big-company ideas like focus groups, which he used to shun. Delegating, and accepting other people’s conclusions, is now easier for him. “There’s been more arguing, challenging and debate in the last two to three years than there’s ever been,” says Mr. Alstead, the chief financial officer.
Mr. Schultz’s take: “What leadership means is the courage it takes to talk about things that, in the past, perhaps we wouldn’t have, because I’m not right all the time.”
Born entrepreneurs are not necessarily born managers. You need creativity and drive to start a company, discipline and delegation to run one. In the last year, people who work closely with Mr. Schultz say, he has shown he can make the leap.
Perhaps the bigger question is whether Mr. Schultz can, as he likes to say, preserve Starbucks’s soul, or whatever soul it has left. In a switch, the company is designing new stores with local woods, furniture and art, to make them feel more like a neighborhood shop. It is also buying specialty beans in limited supply, as artisanal shops do.
Whether Starbucks can recapture a neighborhood feel, as Mr. Schultz insists, is anyone’s guess. For many people, especially in areas where carefully made, lighter-roast coffee from the likes of Stumptown and Intelligentsia is trendy, Starbucks has become a place to go for free Wi-Fi, or to use the restroom, or to buy a coffee on the go.
There is a market for a convenient coffee chain, as the recent Starbucks sales rebound shows. But some customers and analysts say that the mass-market approach conflicts with Mr. Schultz’s vision of a global giant that somehow feels local everywhere.
Mr. Simon of Temple University says: “When you’re selling stuff people don’t need, you’ve got to be selling something else, and that’s what Starbucks lost. There’s a kind of dissonance between the messaging and the actual practice.”
Mr. Schultz no longer plans to blanket the United States with new Starbucks stores, sometimes with multiple locations on one block — a practice that inspired a contest on Flickr to see how many Starbucks shops people could fit into a single photograph. Instead, like so many other executives, he has his sights on China. Starbucks already has roughly 430 stores in mainland China and plans to have 1,500 there by 2015. India beckons as well. The company also plans to sell a wider variety of drinks and foods in grocery stores and its own shops, like Kind fruit and nut bars, which Starbucks put on the map.
IT may be difficult to believe, but there was a time when McDonald’s was a novelty. But, like Ray Kroc, who took over a small hamburger business and built it into the most successful fast food operation in the world, Mr. Schultz has learned that growth can be seductive, and that it can exact a price.
Starbucks and its leader are more measured than during his last stint in the corner office. “I think we are very conscious of the things that we have done wrong over the years, particularly when we just got caught up in the growth phase,” says Mr. Shennan, the Starbucks director. “We are not going to do that again under Howard’s management, I tell you, or the current board’s.”
In January, three years after his return, Mr. Schultz stood before 1,100 employees at the headquarters here. Three thousand more from around the world were patched in via Webcast. The company had finished its strongest holiday season ever, and Mr. Schultz had just unveiled its new, “coffee”-less logo. Yet his words were laced with caution.
“We have won in many ways,” he said, “but I feel it’s so important to remind us all of how fleeting success and winning can be.”
01/03 Political Crisis in Ivory Coast Cripples a City
March 1, 2011
By ADAM NOSSITER
ABIDJAN, Ivory Coast — At the Marcory market, iron shutters are pulled down tight over storefronts for block after block. In the Koumassi neighborhood, idle men drift up to a rare open vendor, cadging a lone cigarette. Fish and grain stalls on the road into another area, Abobo, are deserted, save the rats scurrying in a facing gutter. Lines of women, fleeing the violence in a single-file exodus, balance possessions on their heads and then scatter at the sound of nearby gunfire.
Abidjan, once West Africa’s most important city, is collapsing under the weight of Laurent Gbagbo’s armed fight to stay in power, three months after losing a presidential election.
Businesses are shutting, employees are being laid off by the dozen and families complain of going without meals. Traffic is minimal, and roadblocks operated by rock-wielding, pro-Gbagbo youth groups are everywhere. Amid the torrent of international sanctions against him, banks have closed, all A.T.M.’s have shut down and cash is rarer by the day.
But still Mr. Gbagbo refuses to yield. If anything, the world’s shift of focus to the uprisings in the Arab world appears to have emboldened him. Bloody incursions continue into neighborhoods that support the opposition. Xenophobic language airs nightly on the state television channel and from the mouths of government officials — “France, the United States and the United Nations are provoking civil war in Ivory Coast,” a Gbagbo spokesman, Alain Toussaint, said in a recent interview. And on Monday, Mr. Gbagbo’s forces fired on United Nations inspectors seeking to determine whether his government had imported attack helicopters from Belarus in violation of an arms embargo.
This week also, nine newspapers opposed to Mr. Gbagbo closed, saying they could no longer withstand police harassment and constant threats of violence against their journalists. “They’ve been summoned repeatedly by the Crime Squad” of the Gbagbo government, said a spokesman for the papers, Dembele Al Seni.
Meanwhile, the man who nations across the world say defeated Mr. Gbagbo in last year’s election, Alassane Ouattara, a former International Monetary Fund official, remains trapped in a lagoon-side hotel, protected by United Nations troops.
But increasing signs of armed assaults against Mr. Gbagbo’s forces have appeared in recent days. Some of his soldiers— estimates range from 3 to 27 — were killed in Abobo last week by a shadowy militia that fades into the neighborhood after attacking, leaving pro-Gbagbo troops, rifles bristling from the sides of trucks, cautiously patrolling Abobo’s edges. And late last week, gunmen affiliated with the armed rebellion against the government in 2002 captured several small towns in the country’s west from Mr. Gbagbo’s forces.
“It’s war in the trenches, not open warfare,” said a diplomat, who was not authorized to speak publicly on the matter, predicting further bloodshed and no quick resolution.
He said armed “pressure” on Mr. Gbagbo had begun, aided by defections from his troops. With diminishing revenue coming into the government — European Union sanctions have blocked trade with certain entities tied to the government, including the ports — and the nation’s accounts at the regional central bank shut off by West African leaders, only about half of February’s army and civil-service salaries were paid, the diplomat said.
The new resistance has increased perils here. “The danger of reprisals on civilians is very real,” the diplomat said. “I’m afraid the price of his fall could be very heavy, like Qaddafi.”
In Abidjan, blocklong fields of uncollected garbage are not uncommon, and signs of exasperation with this stifling status quo are everywhere.
On Tuesday morning, dozens of women marched in a tight pack through the mostly pro-Ouattara Koumassi neighborhood waving leafy branches and chanting “We want peace!” — one of a number of spontaneous anti-Gbagbo demonstrations here in recent days.
Gunfire sounded the previous night in Koumassi, and there were several deaths. Mr. Gbagbo’s forces often raid in darkness, the residents explained. Then on Tuesday again, the pop-popping of semiautomatic rifles by Mr. Gbagbo’s troops could be heard after several minutes, a warning to the marchers. Yet they kept on.
“We’re marching because we are tired,” Kankou Samaké shouted above the din. “We can’t sleep. We are not able to eat. And our husbands are not working since Gbagbo demonized the whites,” she said, explaining that European-owned firms here had shut down or suspended operations.
“We are hungry. There is no work for our men,” said another marcher, Aminata Traoré.
A line of neighborhood men watched the women, approving but not joining in. “They are fed up,” said Maiga Mikailou, a hardware-stall owner, explaining that his store had been closed for a week. “Nobody is eating.”
Elsewhere in Abidjan, fear prevailed over anger.
“It’s too frightening,” said an Abobo resident, Jean Kimon, walking slowly down the road out of the neighborhood, carrying his possessions in a small plastic bag. “Everyone’s leaving.”
A thin trickle of women followed Mr. Kimon. “Too dangerous to stay,” a woman said, walking as fast as the large plastic bag on her head would allow her to. “The attackers are threatening us,” she said. “There are bodies on our street.”
Shattered storefronts lined the road, looted over the weekend by pro-Gbagbo youth in a neighborhood supporting his rival, residents said. The political violence has added to the economic misery, which has become more acute as the crisis wears on.
“Everything’s broken,” said an unemployed electrician, Kouamé Konan, looking across the road. “Where are you going to work? Nobody can pay you anyway.”
The normally bustling Sococé shopping center in Deux Plateaux, another neighborhood, was unusually quiet Tuesday afternoon. The president of Ivory Coast’s National Union of Shopkeepers, Abdoulaye Diakité, slowly sipped a coffee and explained: “It’s total desolation. Our members are in a panic. They don’t know what to do. They have no access to their assets. And their stores have been looted.”
By ADAM NOSSITER
ABIDJAN, Ivory Coast — At the Marcory market, iron shutters are pulled down tight over storefronts for block after block. In the Koumassi neighborhood, idle men drift up to a rare open vendor, cadging a lone cigarette. Fish and grain stalls on the road into another area, Abobo, are deserted, save the rats scurrying in a facing gutter. Lines of women, fleeing the violence in a single-file exodus, balance possessions on their heads and then scatter at the sound of nearby gunfire.
Abidjan, once West Africa’s most important city, is collapsing under the weight of Laurent Gbagbo’s armed fight to stay in power, three months after losing a presidential election.
Businesses are shutting, employees are being laid off by the dozen and families complain of going without meals. Traffic is minimal, and roadblocks operated by rock-wielding, pro-Gbagbo youth groups are everywhere. Amid the torrent of international sanctions against him, banks have closed, all A.T.M.’s have shut down and cash is rarer by the day.
But still Mr. Gbagbo refuses to yield. If anything, the world’s shift of focus to the uprisings in the Arab world appears to have emboldened him. Bloody incursions continue into neighborhoods that support the opposition. Xenophobic language airs nightly on the state television channel and from the mouths of government officials — “France, the United States and the United Nations are provoking civil war in Ivory Coast,” a Gbagbo spokesman, Alain Toussaint, said in a recent interview. And on Monday, Mr. Gbagbo’s forces fired on United Nations inspectors seeking to determine whether his government had imported attack helicopters from Belarus in violation of an arms embargo.
This week also, nine newspapers opposed to Mr. Gbagbo closed, saying they could no longer withstand police harassment and constant threats of violence against their journalists. “They’ve been summoned repeatedly by the Crime Squad” of the Gbagbo government, said a spokesman for the papers, Dembele Al Seni.
Meanwhile, the man who nations across the world say defeated Mr. Gbagbo in last year’s election, Alassane Ouattara, a former International Monetary Fund official, remains trapped in a lagoon-side hotel, protected by United Nations troops.
But increasing signs of armed assaults against Mr. Gbagbo’s forces have appeared in recent days. Some of his soldiers— estimates range from 3 to 27 — were killed in Abobo last week by a shadowy militia that fades into the neighborhood after attacking, leaving pro-Gbagbo troops, rifles bristling from the sides of trucks, cautiously patrolling Abobo’s edges. And late last week, gunmen affiliated with the armed rebellion against the government in 2002 captured several small towns in the country’s west from Mr. Gbagbo’s forces.
“It’s war in the trenches, not open warfare,” said a diplomat, who was not authorized to speak publicly on the matter, predicting further bloodshed and no quick resolution.
He said armed “pressure” on Mr. Gbagbo had begun, aided by defections from his troops. With diminishing revenue coming into the government — European Union sanctions have blocked trade with certain entities tied to the government, including the ports — and the nation’s accounts at the regional central bank shut off by West African leaders, only about half of February’s army and civil-service salaries were paid, the diplomat said.
The new resistance has increased perils here. “The danger of reprisals on civilians is very real,” the diplomat said. “I’m afraid the price of his fall could be very heavy, like Qaddafi.”
In Abidjan, blocklong fields of uncollected garbage are not uncommon, and signs of exasperation with this stifling status quo are everywhere.
On Tuesday morning, dozens of women marched in a tight pack through the mostly pro-Ouattara Koumassi neighborhood waving leafy branches and chanting “We want peace!” — one of a number of spontaneous anti-Gbagbo demonstrations here in recent days.
Gunfire sounded the previous night in Koumassi, and there were several deaths. Mr. Gbagbo’s forces often raid in darkness, the residents explained. Then on Tuesday again, the pop-popping of semiautomatic rifles by Mr. Gbagbo’s troops could be heard after several minutes, a warning to the marchers. Yet they kept on.
“We’re marching because we are tired,” Kankou Samaké shouted above the din. “We can’t sleep. We are not able to eat. And our husbands are not working since Gbagbo demonized the whites,” she said, explaining that European-owned firms here had shut down or suspended operations.
“We are hungry. There is no work for our men,” said another marcher, Aminata Traoré.
A line of neighborhood men watched the women, approving but not joining in. “They are fed up,” said Maiga Mikailou, a hardware-stall owner, explaining that his store had been closed for a week. “Nobody is eating.”
Elsewhere in Abidjan, fear prevailed over anger.
“It’s too frightening,” said an Abobo resident, Jean Kimon, walking slowly down the road out of the neighborhood, carrying his possessions in a small plastic bag. “Everyone’s leaving.”
A thin trickle of women followed Mr. Kimon. “Too dangerous to stay,” a woman said, walking as fast as the large plastic bag on her head would allow her to. “The attackers are threatening us,” she said. “There are bodies on our street.”
Shattered storefronts lined the road, looted over the weekend by pro-Gbagbo youth in a neighborhood supporting his rival, residents said. The political violence has added to the economic misery, which has become more acute as the crisis wears on.
“Everything’s broken,” said an unemployed electrician, Kouamé Konan, looking across the road. “Where are you going to work? Nobody can pay you anyway.”
The normally bustling Sococé shopping center in Deux Plateaux, another neighborhood, was unusually quiet Tuesday afternoon. The president of Ivory Coast’s National Union of Shopkeepers, Abdoulaye Diakité, slowly sipped a coffee and explained: “It’s total desolation. Our members are in a panic. They don’t know what to do. They have no access to their assets. And their stores have been looted.”
12/03 A Swift Deal May Not Be a Sound One
March 12, 2011
By GRETCHEN MORGENSON
ONE crucial reason the nation’s mortgage industry ran itself — and the entire nation — off the rails was its obsession with speed. Mortgages had to be approved chop-chop, loans pooled instantly. When it came to foreclosure, well, the quicker the better.
So it is disturbing that the same need for speed is at work in the bank settlement being devised by state attorneys general relating to improper loan-servicing and foreclosure practices. When Tom Miller, the Iowa attorney general who leads the talks, announced initial terms of a deal on Monday, he said, “We’re going to move as fast as we can.”
While some might argue that a rapid approach will help borrowers, it is apt to benefit the banks far more. Hurrying to strike a deal means less time to devote to understanding how pernicious the foreclosure practices were at the nation’s largest institutions. How can you determine appropriate penalties for troubling practices when you haven’t conducted a full-fledged investigation?
Remember that the attorneys general who are participating in this settlement process have been a coalition only since October. Two people who have been briefed on the discussions, but who asked for anonymity because the deal was not final, told me last week that no witnesses had been interviewed and that the coalition had sent out just one request for documents — and it has not yet been answered.
And, yet, along comes a 27-page outline of remedies that the banks would have to abide by in their loan servicing and foreclosure businesses. Talk has also circulated that the banks would have to cough up $20 billion to close the deal, though there are no figures in the outline.
Mr. Miller declined to be interviewed about the proposal. But Geoff Greenwood, his spokesman, disputed the notion that the attorneys general have done no investigation. “We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers,” he said. “We know what the problems are, and we know what needs to change.”
Maybe so. But being able to produce reams of deposition testimony from bank employees and documents turned over under subpoena would give those negotiating for consumers and mortgage investors far more leverage than they’d have working with a series of talking points.
Recent lawsuits filed against Bank of America by Terry Goddard, then the Arizona attorney general, and Catherine Cortez Masto, Nevada’s attorney general, show the power that in-depth investigations provide. Both cases contend that the bank engaged in consumer fraud by failing to abide by loan modification provisions of a previous state settlement completed with Countrywide Financial in 2009. The bank has disputed the allegations, but the filings by these officials are chock-full of details gleaned from investigating more than 250 consumer complaints.
Mr. Miller’s list of remedies is helpful in showing just how dysfunctional and abusive the loan servicing business has become. Consider this proposed requirement: “Affidavits and sworn statements shall not contain information that is false or unsubstantiated.” And how’s this for revolutionary: “Loan servicers shall promptly accept and apply borrower payments.” (When they don’t, late fees magically appear.) And, get this: Loan servicers should also track the resolution of customer complaints.
You don’t say!
To be sure, there is substance to Mr. Miller’s proposal. A settlement would bar servicers from foreclosing on borrowers amid a loan modification, for example. And when a modification is denied, the servicer would have to explain why, and in detail.
But the terms severely disappoint in their treatment of second liens, a major sticking point in many loan modifications. The proposal would treat first and subsequent mortgages equally, turning upside down centuries-old law requiring creditors at the head of the line to be paid before i.o.u.’s signed later.
Treating holders of first and second liens alike is a boon to the banks, since so many second mortgages are owned by the nation’s largest institutions; many of the firsts are held by investors in mortgage-backed securities. The banks want the first mortgages to take the hit, leaving the seconds intact. Or at least for them both to share the pain equally.
To some degree, the document presented by Mr. Miller raises more questions than it answers. For example, what will state attorneys general have to give up regarding future lawsuits or enforcement actions against the banks if they sign on to the settlement? Typically, such deals contain releases barring participants from bringing new but related cases.
As they negotiate with Mr. Miller, you can bet the banks will push for aggressive releases. But because these institutions underwrote many toxic loans in the boom, barring attorneys general from bringing actions against them for lending improprieties is no way to hold dubious actors accountable.
One attorney general, Eric Schneiderman of New York, is concerned about such releases. According to a person briefed on the discussions, Mr. Schneiderman has told Mr. Miller that he will not participate in a deal that would preclude his office from pursuing claims against the banks relating to their mortgage origination, securitization and marketing practices. Mr. Schneiderman declined to comment.
IT is also unclear whether the settlement would prevent borrowers or investors from bringing their own lawsuits against loan servicers — a terrible result. And the list of terms has only the briefest mention of restitution for borrowers who have been hurt by questionable loan servicing.
These borrowers are legion. Reparations should not be limited only to those who were removed from homes improperly. Consider four who are suing the Money Store, a lender and loan servicer. Their two cases contend that the Money Store levied improper legal fees while borrowers were in foreclosure; one case has been dragging on for 10 years, the other for eight.
According to court filings, one couple paid $1,125 in legal fees and expenses associated with two bankruptcy motions that were never filed. They also paid $4,418 for legal work said to have been done by an outside firm (which lawyers for the Money Store have not proved it paid).
Another borrower paid $1,750 for legal fees that the Money Store could not show were paid to the firm that supposedly did the work. And yet another borrower paid $5,076 in fees and expenses that do not appear to have been submitted to the outside firm charged with the legal work, according to court filings.
“We picked four plaintiffs out of the hat here, and all four of them had situations where thousands of dollars in legal fees were passed on to them but where the evidence indicates the law firms were never paid,” said Paul Grobman, a New York lawyer for the borrowers. He wants to know if the servicer kept the fees.
The lead lawyer representing the Money Store declined to comment.
Shoddy loan servicing has clearly done significant damage to borrowers. If a state settlement morphs into yet another gift to the banks, let’s hope that at least some attorneys general will take a different path.
By GRETCHEN MORGENSON
ONE crucial reason the nation’s mortgage industry ran itself — and the entire nation — off the rails was its obsession with speed. Mortgages had to be approved chop-chop, loans pooled instantly. When it came to foreclosure, well, the quicker the better.
So it is disturbing that the same need for speed is at work in the bank settlement being devised by state attorneys general relating to improper loan-servicing and foreclosure practices. When Tom Miller, the Iowa attorney general who leads the talks, announced initial terms of a deal on Monday, he said, “We’re going to move as fast as we can.”
While some might argue that a rapid approach will help borrowers, it is apt to benefit the banks far more. Hurrying to strike a deal means less time to devote to understanding how pernicious the foreclosure practices were at the nation’s largest institutions. How can you determine appropriate penalties for troubling practices when you haven’t conducted a full-fledged investigation?
Remember that the attorneys general who are participating in this settlement process have been a coalition only since October. Two people who have been briefed on the discussions, but who asked for anonymity because the deal was not final, told me last week that no witnesses had been interviewed and that the coalition had sent out just one request for documents — and it has not yet been answered.
And, yet, along comes a 27-page outline of remedies that the banks would have to abide by in their loan servicing and foreclosure businesses. Talk has also circulated that the banks would have to cough up $20 billion to close the deal, though there are no figures in the outline.
Mr. Miller declined to be interviewed about the proposal. But Geoff Greenwood, his spokesman, disputed the notion that the attorneys general have done no investigation. “We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers,” he said. “We know what the problems are, and we know what needs to change.”
Maybe so. But being able to produce reams of deposition testimony from bank employees and documents turned over under subpoena would give those negotiating for consumers and mortgage investors far more leverage than they’d have working with a series of talking points.
Recent lawsuits filed against Bank of America by Terry Goddard, then the Arizona attorney general, and Catherine Cortez Masto, Nevada’s attorney general, show the power that in-depth investigations provide. Both cases contend that the bank engaged in consumer fraud by failing to abide by loan modification provisions of a previous state settlement completed with Countrywide Financial in 2009. The bank has disputed the allegations, but the filings by these officials are chock-full of details gleaned from investigating more than 250 consumer complaints.
Mr. Miller’s list of remedies is helpful in showing just how dysfunctional and abusive the loan servicing business has become. Consider this proposed requirement: “Affidavits and sworn statements shall not contain information that is false or unsubstantiated.” And how’s this for revolutionary: “Loan servicers shall promptly accept and apply borrower payments.” (When they don’t, late fees magically appear.) And, get this: Loan servicers should also track the resolution of customer complaints.
You don’t say!
To be sure, there is substance to Mr. Miller’s proposal. A settlement would bar servicers from foreclosing on borrowers amid a loan modification, for example. And when a modification is denied, the servicer would have to explain why, and in detail.
But the terms severely disappoint in their treatment of second liens, a major sticking point in many loan modifications. The proposal would treat first and subsequent mortgages equally, turning upside down centuries-old law requiring creditors at the head of the line to be paid before i.o.u.’s signed later.
Treating holders of first and second liens alike is a boon to the banks, since so many second mortgages are owned by the nation’s largest institutions; many of the firsts are held by investors in mortgage-backed securities. The banks want the first mortgages to take the hit, leaving the seconds intact. Or at least for them both to share the pain equally.
To some degree, the document presented by Mr. Miller raises more questions than it answers. For example, what will state attorneys general have to give up regarding future lawsuits or enforcement actions against the banks if they sign on to the settlement? Typically, such deals contain releases barring participants from bringing new but related cases.
As they negotiate with Mr. Miller, you can bet the banks will push for aggressive releases. But because these institutions underwrote many toxic loans in the boom, barring attorneys general from bringing actions against them for lending improprieties is no way to hold dubious actors accountable.
One attorney general, Eric Schneiderman of New York, is concerned about such releases. According to a person briefed on the discussions, Mr. Schneiderman has told Mr. Miller that he will not participate in a deal that would preclude his office from pursuing claims against the banks relating to their mortgage origination, securitization and marketing practices. Mr. Schneiderman declined to comment.
IT is also unclear whether the settlement would prevent borrowers or investors from bringing their own lawsuits against loan servicers — a terrible result. And the list of terms has only the briefest mention of restitution for borrowers who have been hurt by questionable loan servicing.
These borrowers are legion. Reparations should not be limited only to those who were removed from homes improperly. Consider four who are suing the Money Store, a lender and loan servicer. Their two cases contend that the Money Store levied improper legal fees while borrowers were in foreclosure; one case has been dragging on for 10 years, the other for eight.
According to court filings, one couple paid $1,125 in legal fees and expenses associated with two bankruptcy motions that were never filed. They also paid $4,418 for legal work said to have been done by an outside firm (which lawyers for the Money Store have not proved it paid).
Another borrower paid $1,750 for legal fees that the Money Store could not show were paid to the firm that supposedly did the work. And yet another borrower paid $5,076 in fees and expenses that do not appear to have been submitted to the outside firm charged with the legal work, according to court filings.
“We picked four plaintiffs out of the hat here, and all four of them had situations where thousands of dollars in legal fees were passed on to them but where the evidence indicates the law firms were never paid,” said Paul Grobman, a New York lawyer for the borrowers. He wants to know if the servicer kept the fees.
The lead lawyer representing the Money Store declined to comment.
Shoddy loan servicing has clearly done significant damage to borrowers. If a state settlement morphs into yet another gift to the banks, let’s hope that at least some attorneys general will take a different path.
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