CONDÉ NAST PORTFOLIO EXAMINES WHETHER WALL STREET IS BROKEN AND REVEALS
WHY SOME INVESTMENT BANKS WON’T MAKE IT

PLUS: 23ANDME BRINGS GENETIC TESTING TO YOUR LAPTOP; HOW YOUPORN KILLED THE SMUT BUSINESS; AN EXCLUSIVE INTERVIEW WITH INDIA’S FIRST ‘TRILLIONAIRE’ MUKESH AMBANI; AND WHY BEN BERNANKE CAVED

New York–In the November 2007 issue of Condé Nast Portfolio, senior writer Jesse Eisinger reports how the big investment banks, loaded with dangerous amounts of debt, are facing their own version of a subprime slump, and examines whether they can survive (“Wall Street Requiem,” p. 178). “When two Bear Stearns hedge funds went belly-up this summer, Wall Street shook its head, tut-tutting that the collapse was inevitable, given how the funds were structured. For every $1 of equity in them, the funds’ managers had borrowed to make about $10 in investments,” Eisinger writes. “It’s a lesson investors apparently have to learn again and again: Leverage works wonders on the way up but can be brutal on the way down. That’s why Wall Street is worried about another entity on the edge.  It has an astounding $29.90 of assets for every $1 of equity. It’s called Bear Stearns.” Eisinger reports how Wall Street’s five freestanding investment banks—Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns—are loaded up with too many assets, supporting too much debt with too little down. Eisinger examines whether the business models of the big independent investment banks could be fundamentally flawed, as their success has been a product of great risk, and the growth in revenue and income has come mostly from betting with their own capital. “The independents have spent the past decade intentionally moving away from mainstay businesses and into riskier niches, where they made big bets for themselves. For a time, the shift was lucrative. But now the foundation is buckling…While Bear is in the crosshairs now, it may not be alone for long,” he writes. “In past cycles, [Wall Street investment banks] came out of credit debacles very strongly because they didn’t take those risks,” says Charles Peabody, an analyst for the independent research firm Portales Partners. “There’s a strong chance that certainly one and maybe two will be rolled up into another entity in a forced marriage.” Only Goldman is looking solid, reports Eisinger, who deems it unlikely that Bear will be able to stay independent. “There is an end-of-era feel to the whole thing,” Eisinger observes.

Also in the November issue:
“Obscene Losses” (p. 184). Contributing editor Claire Hoffman investigates how the pornography business seemed immune to weak sales until sites like YouPorn.com and Pornotube.com began offering user-generated video for free. “As the portion of Americans with broadband connections (47 percent and growing) continues to rise, consumers are becoming increasingly addicted to the immediate gratification of Web video,” Hoffman writes. “But suddenly, there’s a chasm between porn consumption and porn sales. While sales of internet-based adult entertainment grew 14 percent last year, to $2.8 billion, that figure would be substantially higher if there wasn’t so much free competition, especially from the user-generated adult sites.” YouPorn lets users upload and watch a virtually unlimited selection of hardcore sex videos for free, and like YouTube, the site has far more traffic than income, Hoffman reports. Just nine months after going live, YouPorn was on pace to log about 15 million unique visitors in May and its audience is growing at a rate of 37.5 percent a month. Hoffman notes that much like the TV networks, movie studios, and record labels are reacting to the digital challenge to their traditional business plans, porn companies are also engaged in a frantic attempt to diversify their offerings. Steven Hirsh, founder of Vivid Entertainment Group, the world’s largest producer of adult videos, tells Hoffman he was approached by Stephen Paul Jones, who said he owned the site, in an effort to sell him YouPorn. Hoffman tracks down Jones, who on the phone insisted he was a 27-year old hedge fund analyst who was concealing his identity to protect his day job. Arriving at his home in Lake Tahoe, Hoffman finds Jones, a blond barrel-chested man with a wife, an entourage of children, a three story house and an enormous backyard, and who in person, vehemently denies that he owns YouPorn. Hirsch later tells Hoffman that he has no plans to buy the site, mainly because of the legal exposure associated with hosting user-generated pornography as well as the uncertainty of how to draw profits from YouPorn. According to several industry executives, YouPorn hasn’t been sold. “What you’re losing in the DVD market, you’re not making up on the paid internet side,” says Paul Fishbein, president of Adult Video News. “Instead of 99 cents a song on iTunes, these guys are doing 10 cents a minute for porn.”

“Welcome to the Future” (p. 192). Contributing writer David Ewing Duncan profiles secretive Silicon Valley startup 23andMe—named after the number of paired chromosomes in every human—which is entering into a genetic-testing market that some analysts predict could be worth a staggering $12.5 billion by 2009. 23andMe’s co-founder, former biotech investor Anne Wojcicki, is the wife of Sergey Brin, and in May, Google invested $3.9 million in the tiny startup, part of $10 million raised in a recent round of private funding, Duncan writes. This influx of capital reportedly allowed the company to pay back a $2.6 million personal loan from Brin, who has said that he wants to unleash Google’s search technology to make sense of genomics. 23andMe has not discussed pricing, but Duncan reports that competitors are talking about charging upwards of $2,000 a person. Scientists and ethicists warn that users of such websites could make life decisions based on incomplete or erroneous science. “Just because we have identified a gene doesn’t mean its function or its impact has been thoroughly understood or that having a gene has any real predictive value,” says Francis Collins, who now directs the National Human Genome Research Institute. Many physicians and ethicists are uncomfortable with the idea of websites delivering genetic results directly to consumers, especially for diseases that have no cure.

 “The Convict and the Congressman” (p. 106). Contributing editor Andrew Rice investigates how Democratic congressman William Jefferson, former tech millionaire Vernon Jackson, and Nigerian politician Atiku Abubakar are central figures in one of the most sprawling corruption investigations in recent American history. Recently unsealed affidavits filed in support of the F.B.I.’s search warrants suggest that Jefferson was a secret shareholder in Jackson’s iGate—a company he had publicly championed that was trying to make a $200 million-a-year deal to provide high-speed internet services to consumers in Nigeria—and had conspired to further the deal by bribing Abubakar. “The story of the congressman with 90 grand in his icebox quickly became a national joke, another colorful example of Capitol Hill corruption,” Rice writes. “Yet the case would prove to have implications far more momentous than a punch line. In Washington, it would lead to William Jefferson’s indictment and a constitutional clash over the executive branch’s powers to investigate members of Congress. In Nigeria, it would scuttle Atiku Abubakar’s campaign to become the next elected leader of one of the world’s largest oil producers. And back in Louisville, it would upend the life of a flawed man with a promising idea.” Rice goes inside one of the biggest scandals to hit America’s Black elite in decades and examines whether this was a case of New Orleans corruption trumping Nigerian corruption.

“Rich Man, Poor Country” (p.168). Staff writer Sheelah Kolhatkar profiles Indian tycoon Mukesh Ambani, chairman of Reliance Industries—India’s General Electric—who has emerged as the country’s premier capitalist, directing sprawling business operations that represent about 3 percent of India’s $4.1 trillion economy, with annual revenue of more than $27 billion. “I’d go so far as to say that he’s pretty much running India,” Shobhaa Dé, a bestselling novelist and cultural observer, says of Ambani. Ambani is reportedly moving into the world’s most expensive house—a $1 billion 60-story home in Mumbai—and he’s constructing the world’s largest oil-refining complex while trying to remake India’s scattershot retail industry. “Within a new culture celebrating money and success he’s a hero, a Bollywoodworthy representative of the country’s prosperity and self- confidence,” Kolhatkar writes. “But he’s also one of India’s most polarizing figures, a businessman famous for bulldozing anyone who resists his intentions to expand his old-line industrial companies and whose extreme riches conflict with the country’s Gandhian leanings.” Kolhatkar notes his success in pushing his epic projects through a place that’s infamous for its crippling bureaucracy prompts questions among his countrymen about his close ties to government officials. “There is an astonishing amount of wealth creation going on in India, but it’s disproportionately accruing to a few, which is creating a crisis in the system,” says Ravi Venkatesan, the chairman of Microsoft India. “If 780 million people don’t share in this wealth-creation process, in a democracy, can this continue? The answer is no.”

Plus:
“Fred Thompson’s Big Flop” (p. 76). Washington editor Matthew Cooper takes a look at a long-forgotten Senate hearing on campaign finance in 1996, which reveals why then chairman of the Senate Governmental Affairs committee and now presidential hopeful Fred Thompson is unprepared to lead. Cooper writes, noting that, as the hearings progressed, a number of campaign-finance abuses were uncovered, but the explosive charge with which Thompson began the hearings—that the Chinese government had attempted to manipulate American elections—was never proved and was disputed. “[I]f Americans are looking for competent governance after the current president, there’s no indication that Thompson, for all his stage presence, is any more capable of delivering it. And if the country’s now looking for a uniter instead of a divider, there’s even less indication that Thompson is that man. Tasked with investigating what everyone acknowledged to be a particularly flawed campaign in a flawed system, Thompson managed to alienate both Democrats and his own party,” Cooper writes.

“Why He Caved” (p. 71). When he slashed interest rates, Federal Reserve chairman Ben Bernanke proved academic expertise couldn’t overcome a real lending crisis, writes contributing editor John Cassidy. “The Fed chairman found himself sandwiched between his academic beliefs and the real world. While he might have liked to teach investors a lesson about the theoretical costs of risk, in reality the economy was, and still is, shaky. So when Wall Street stood up to the chairman, he caved,” Cassidy writes. “For now, the Fed chairman’s about face has won him plaudits from investors, politicians, and homeowners…. The financial system remains heavily leveraged. And even if the Fed manages to stabilize the credit markets and head off an election-year recession, can that really be counted as a triumph?” Cassidy asks. “To bring an end to the boom-bust cycle, a Fed chairman is going to have to stand up to Wall Street and face the short-term consequences. Unless Bernanke reverses himself again, he won’t be that chairman.”

“Fashion’s Next Big Bang” (p. 198). Contributing editor Karl Taro Greenfeld profiles Nigo, the founder and designer of the streetwear brand A Bathing Ape (Bape), the ne plus ultra of urban streetwear popular with rappers and style-conscious musicians, and examines whether Nigo will sell out and turn his brand into a global icon, a hip-hop Polo, or whether he will crash and burn. “Our goal has been steady, regular growth. Ten percent a year is manageable,” he says. With 22 stores worldwide, Bape revenue in 2006 grew 40 percent, from $42 million to $59 million. Nigo asks, “Can something big ever really be cool?”