The Lloyd's Prayer

Thanks to Richard Ambrose for this adaptation of the Lord's Prayer as spoken by the executives at Goldman Sachs. I found this at Barry Ritholtz's blog "The Big Picture," a site that every business student should bookmark immediately.

THE LLOYD’s Prayer

Our Chairman,
Who Art At Goldman,
Blankfein Be Thy Name.
The Rally’s Come. God’s Work Be Done
On Earth As There’s No Fear Of Correction.
Give Us This Day Our Daily Gains,
And Bankrupt Our Competitors
As You Taught Lehman and Bear Their Lessons.
And Bring Us Not Under Indictment.
For Thine Is The Treasury,
The House And The Senate
Forever and Ever.
Goldman.

Darkness Before the Storm

David Rosenberg, ex-chief economist for Bank of America-Merrill Lynch, has made some dire predictions concerning the economic outlook. He believes that we are headed for an unemployment rate, the exclusive U3, between 12-13%. This would place the U6, consisting of people who have given up looking for work and those who have taken part-time jobs, at around 20%. Compounding this prediction is Edward Harrison's belief - whose "Credit Writedowns" website is considered one of the top financial sites on the Internet - that we are now headed into a real depression.

Harrison's view is that debt is the underlying feature of this downturn, which coincides with Yale economist John Geanakoplos theory of collateral and the lack thereof that led to this global meltdown.

Harrison wrote, "When debt is the real issue underlying an economic downturn, the result is a period of stagnation and short business cycles as we have seen in Japan over the last two decades. This is what a modern-day depression looks like – a series of W’s where uneven economic growth is punctuated by fits of recession. A recession is merely a period of recalibration after businesses get ahead of themselves by overestimating consumption demand and are then forced to cut back by making staff redundant, paring back inventories and cutting capacity."

We all know that the subprime mortgage market in conjunction with pyramidal layers of derivative gambles contributed to this monetary malaise, but it is only the precursor of two more real estate implosions: 1) the prime loans that were made with 'exotic' conditions - these reset next March - and 2) commercial real estate, which is already starting to crumble.

Lest you think that I'm here to incite suicidal thoughts, my motive is quite the contrary; there is money to be made during crises, but the businesses have to be carefully chosen. Here is a list of recession-proof business ideas, and here is a compendium of career choices from which to focus your MBA and skills during bad economic times.


"The Chinese use two brush strokes to write the word 'crisis.' One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger - but recognize the opportunity."

John F. Kennedy, Speech in Indianapolis, April 12, 1959

Meet the New Boss, Same as the Old Boss

The Wall Street Journal published an article today about the pioneering work of Yale University economist John Geanakoplos. Working in the academic version of a rat-infested basement with sooty windows letting in streaks of dim light, he has toiled for years trying to redefine the nature of collateral in our modern economy. His ground-breaking work? That when investments contain overleveraged or synthetic collateral as backing, the efficient market hypothesis is no longer valid, i.e. investors no longer have access to all pertinent information, and the price will no longer reflect an accurate market assessment of value. Financial derivatives, collateralized debt obligations, and a whole odd-lot assortment of "casino" investments qualify, explaining in part the economic collapse. Wow, on the surface, this seems like big news.

According to Geanakoplos, when there is a margin call because of concern over future expectations and collateral is short, prices drop, which further exacerbate the situation. Mmmm, this sounds very familiar. In fact, this "new paradigm" seems to have its roots in the 1929 stock market collapse, which was triggered by margin calls because the collateral to cover didn't exist.

There's no "new thinking" here. Investments, whether in a Wall Street casino or a Main Street home, had no down payment, no collateral. This is nothing short of fraud. What he's really saying is that when you defraud investors, they get burned. And when you defraud an entire industry, the global economy gets burned. Yet, no one has been charged with this crime, a transgression that makes Bernie Madoff seem like he stole penny candy. Why?

Let's not forget the words of Jean Rostand, French experimental biologist and philosopher: "Kill a man and you're a murderer, kill many and you're a conqueror, kill them all and you're a god."

Insider Scathing

Galleon hedge fund founder, Raj Rajaratnam, has been in the news lately for operating a ring of hi-tech corporate insiders and analysts who willingly divulged nonpublic information, which in turn allowed Galleon to reap less-risk, mo'-money profits. In his case, the moniker "hedge fund" was used to describe a hedge against the efficient-market hypothesis by obtaining illegal information to consistently outperform the broader market through "sure bets."

There are a number of academics and pundits who believe that Rajaratnam's transgressions are in fact helpful to the markets; after all, it was he who first provided information that brought prices into equilibrium. Besides, he really wasn't an "insider," but an outsider who got insiders to talk freely by, in some cases, paying them tens of thousands of dollars. Of course, he made $8 million short-selling Google from this information, among many other prescient trades.

The Securities and Exchange Commission defines illegal insider trading as the "buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security." It seems that they are behind the times, outmoded, and anachronistic; they actually believe that insider trading "undermines investor confidence in the fairness and integrity of the securities markets." The SEC seems to be enamored with this thing called risk; they think that if risk is equally distributed, then the markets will operate as they should. But more advanced minds disagree, saying that if everyone traded on nonpublic information, then our markets would be absolutely lighting-fast and efficient. Or perhaps we wouldn't have markets at all because very few will buy shares for which a select few are guaranteed a risk-free profit.

Rajaratnam's public service by trading in advance of released news should be examined - perhaps we should all sell out our fiduciary responsibility in order to provide the fastest possible correction in the markets. Just imagine, every insider from every public company selling materially significant news to outsiders whose role is to provide rapid price equilibrium. But if the company is not making fraudulent representations of its financial performance, does it matter how quickly the news is acted upon? If everyone has the same information, a price correction that occurs next Tuesday will have exactly the same effect as one occurring this afternoon. Sure, someone could buy an equity 10 minutes before a catastrophic free fall, but they could also purchase 10 seconds before a huge uptick. Armed with identical information, everyone has a equal risk, the definition of a level playing field. Here's the difference: unless they're a small-time player, anyone acting with insider information will telegraph news through their large long-buy or short-sell orders. The market will then react to this risk-free adventurer with the timidity of having news in advance of its official release, dramatically increasing the buy or sell orders that would have occurred under normal circumstances, which then increase the volatility of the price swings.

In effect, insider trading increases beta for everyone but the insider, whose beta is almost zero.

The reason why we have so many commerce regulations is because most businesses want to manipulate risk, and many executives will do anything to lower their risk profile. Unfortunately for society, risk is a zero-sum game; when a single entity lowers their beta through illegal means, the risk goes up for everyone else.

Personally, I believe that insider trading should be treated the same way that old-school Las Vegas casinos handled card cheats, loaded dice, and rigged slots. If you've seen the movie "Casino," you'll know that the lucky ones got the hammer.

Microsoft's Brilliant Failure

The Microsoft Sidekick phone, which sports address book, photo storage, password, and to-do list services, became a member of Amnesiacs International today when a server crash caused every phone in every market to lose all of its data. Permanently. The phones are made by a MS subsidiary, aptly named Danger, and sold through T-Mobile, who is offering the princely sum of $20 for the inconvenience caused by this loss of mobile memory and function.

Microsoft is suitably apologetic, and their engineers are working feverishly trying to restore at least a few bits of the missing data, but I can't help thinking that this was a conspiracy on par with Roswell and the Kennedy assassination.

Everyone knows that Microsoft hates cloud computing; it's very existence decries the end of the licensed software model upon which Microsoft rests its gigantic carcass. And there is no doubt that this "outage" is causing many to reconsider hosting their data offsite and on the Net. And Microsoft has shown multiple ethical lapses in the past (antitrust violations and patent infringement, to name a two major areas). And doesn't Microsoft know about backing up data? After all, they built Windows.

At this point, the only thing I don't suspect Microsoft's involvement in is with the Unabomber - that's because he wrote everything with paper, pen and ink.

A Case of Irrational Diversification

It was reported this morning that InBev, the new owner of Anheuser-Busch, is selling the Busch theme park properties to the hedge fund Blackstone Group for $2.3 billion. Busch Entertainment, legal owner of the amusements, consists of Busch Gardens (Tampa, FL and Williamsburg, VA) and SeaWorld in San Diego, CA.

Getting beyond the fact that Shamu is now owned by a hedge fund, the question arises, "how did a beer company get into theme parks in the first place?" I think I have the answer.

There is an old story that was circulating years ago about how Walt Disney came to choose Orlando as the site for Walt Disney World. According to the tale, Disney's first choice was St. Louis because of its central location and ease of travel - a TWA hub as well as interstate highways - for the entire country. Disney went to meet with the city fathers and business potentates, which naturally included August "Gussie" Anheuser Busch, Jr., the man who built an empire out of beer.

It seems that Disney was absolutely adamant - there would be no alcohol sales on Disney properties, and certainly not within any Magic Kingdom. Apparently, Gussie took offense at this position and said something to the effect, "any man that doesn't serve Budweiser beer in his theme park is an idiot."

The story goes that on the plane back to California, Disney, recognizing the potential problems that Busch could create for him in St. Louis, told his assistants to, "make it Orlando," which was the second choice.

It would seem that Gussie's ego got the better of him and he decided to launch his own brand of theme parks, family-fun places where Budweiser beer would be flowing profusely. He would go mano-a-mano with Disney, and in the end, Disney did begin serving alcohol at Walt Disney World because prohibition just doesn't work in America.

This could be a case of unrelated diversification engaged in solely because of a single conversation, a slight against a beer man's product, in St. Louis so many years ago.

A Primer in Business Intelligence

As a member of several groups at LinkedIn, I regularly receive emails offering anything from resume writing assistance to executive positions in my old industry, operations support systems software (OSS) for telecommunications providers. Yesterday, an offer of the latter crept into my inbox; any opportunity to regain a vice presidency of marketing deserves a ROI review, and this is no exception.

The VP of global sales for RateIntegration, inc. is seeking a VP of marketing for North America. Among other things, the position description says, "Individual must be equipped for high activity marketing campaigns and work multiple simultaneous campaigns. 10-15 years of successful track record marketing telecom OSS/BSS solutions resulting in measureable improvement in sales results is required." Seems all very nice, but let's dig a little deeper.

First, the company name leaves me confused. On their website, they are "rateintegration," yet the position request has "RateIntegration." Which is it? Or do they not believe that a consistent spelling of the company name is important? Perhaps their venture capital partners, Dolphin Equity Partners and JT Venture Partners, felt that would be too intrusive to mandate a modicum of marketing. But do they really lack marketing skills or is this an ingenious plan?

Some research into the executive management team shows the following pedigrees:

CEO: Bachelor's in Electrical Engineering, Master's in Information Management
CTO: Ph.D. in Computer Science (Carnegie-Mellon, no less!)
VP, Engineering: Bachelor's in Math (Harvard, no less!), Ph.D. in Computer Science
EVP, Finance and Strategy: Bachelor's in Electrical Engineering, MBA
VP, Product Development: Ph.D. in Computer Science
VP, Global Sales: Bachelor's from UC Berkeley

There is certainly no lack of scientific intellect, and at the same time, there is almost no marketing expertise. This tells me that the company is engineering/product focused, almost ensuring marketing myopia (cool product, no market). But what exactly is the product?

rateintegration (or RateIntegration) has developed a neat pricing/rating engine that would allow a telecommunications operator to create a separate usage plan for each and every customer. Imagine "Friends & Family" on steroids and hallucinogens. But who would want to do that? Mass customization only works when you can achieve the efficiencies of mass production with individual customization. Think of the difficulties encountered by Customer Service if every customer had a different rate plan! Yet, the technology is slick and has been adopted by some big players.

Evaluating their customer base, it can be seen that most are large companies with a few million subscribers and all are outside of this hemisphere. While the size bodes well for the software's performance, how will it work in the North America? Based on what I've read, it is questionable as to whether this software is economically viable for Tier 3 operators, but even if it is, what does that business model look like and how many rural phone companies need a NASA-grade pricing and rating engine? As to the larger customers, for the past decade, consolidation in the telecommunications industry has been unprecedented. Most of the Tier 2 operators (1-10 million lines) have been swallowed up by the Tier 1 players. And those Tier 1 companies have established contracts with either AMDOCS, Convergys (the two largest OSS software houses on the planet), or a major systems integrator like Accenture. If you are not working with them, you won't gain entry to the Big Dogs. Which leads me to the next issue - rateintegration is also looking for a VP of channel development, separate from a VP of marketing.

Anyone who has taken an introductory marketing course can explain the 4 Ps of all marketing strategies - Product, Price, Place, and Promotion. In the case of rateintegration, make that 3 Ps because Place, or the supply chain, is separate from the marketing function. How successful will any VP of marketing be in an environment where 25% of your strategy is outside of your control?

To top it off, RateIntegration is also seeking agents and resellers in every major market area around the world simultaneously: NA, EU, EMEA, and Asia. So what does all this information mean? What is the final analysis?

Here's my interpretation of the situation:

1. rateintegration developed a very neat product using venture capital that has unbelievable capabilities, some of which are even desirable by the marketplace.

2. Being a product-focused company, they worked their Rolodexes and found some initial customers. Because the product exceeds requirements and expectations, they are referenceable accounts of good stature.

3. As a group of engineers, they hired a sales person to expand the business. He's hit a brick wall, so now he's trying to hire marketing, channels, agents, and resellers. I find it interesting that the marketing position description calls for the ability to manage multiple campaigns, even before there is a strategy in place. Or have they already developed a marketing plan for the VP of marketing to implement? Maybe they should just outsource the project, because marketing reporting to sales has "doomed to fail" written all over it anyway. Where else would a marketing VP's compensation plan have a large commission component? Of course, "commission plan" tells us that the time horizon for success is very short. Which leads me to the finale...

4. All of this is in response to the VCs reluctance to provide additional capital. Perhaps the worst recession in 70 years has something to do with this new direction for rateintegration? Maybe if they were a marketing-focused company at inception they would be able to weather this storm. But they weren't and based on what I've read and analyzed, taking a job with them would be like betting against the house in Vegas.

I guess I'll just have to finish my MBA.