Putting Money in the Bank

US banks are apparently in much riskier positions overall than even some of the pessimists may have thought. According to an article in the Financial Times, statistics from the FDIC are not looking good:

• The agency says that net income for the entire industry during last year's fourth quarter was not $5.8 billion as previously thought, but $646 million. The downward revision was the result of bank financial restatements, presumably as they wrote off the billions of dollars of imaginary profits and bad loans.


• "Problem" banks have risen from 76 to 90 in number, although that is still a lot lower than during the S&L crisis in the 80s and 90s, when a full 10 percent of banks fell into that category. Their combined assets are $26.3 billion, or about $292 million on average. That is diddly for a financial institution, even a relatively small one.


• So far this year, three banks have failed. Even in last year's turmoil, three failed total, and none failed in the two years prior. The FDIC expects additional failures.


• The coverage ratio - or amount of cash on-hand compared to the total dollar amount of loans that are 90 days or more overdue - has dropped for the eight straight quarter. It's now 89 cents in reserve for every dollar. That's the lowest level since some time in 1993.

According to a quote in the FT, the FDIC is not happy:

“This is the kind of thing that gives regulators heartburn,” said Ms Bair. “We also want them to beef up their capital cushions beyond regulatory minimums given uncertainty about the housing markets and the economy . . . It’s only prudent to be building up capital at a time like this."

There are three reasons I can see that banks may not be putting away enough money: they underestimated how bad things were, they continue to engage in overly risky behavior, or the rate at which loans are going bad is continuing to escalate and every time they think they know what's going on, reality intrudes. My bet is that it's some combination.

Dell Guilty of Fraud: How Not to Make a Name for Yourself

Sometimes it's tough to top a factual roundup of what is happening to a company, and in this case, Dell's latest circumstances say a lot. Being found guilty of fraud? Just how badly does a major company have to behave when a court can rule its business practices fraudulent? It came down to deceiving people - promising technical support that it didn't delivery, and apparently didn't intend to deliver, if my understanding of the law behind fraud is accurate at all:

• The company effectively tried causing customers so much pain that they wouldn't or couldn't use the support services they purchased.


• It often didn't provide the on-site repairs it was contractually obligated to.


• People who purchased "next day" support sometimes had to wait ... an entire year to get a problem resolved.


• The company and its financial services affiliate would advertise no-interest financing and then deny it to almost everyone. It would sometimes charge people interest rates as high as 30 percent even when those people actually did qualify for the special financing.

Here's Dell's response, according to the IDG News story:

The court laid out plans for investigating how many people have been affected as a way to determine restitution. Dell hopes that the court will find that only a few people had bad experiences. "We're confident that when the proceedings are completed, the court will determine that only a relatively small number of customers have been affected," Dell said in a statement. "We believe that our customer service levels are at or above industry standards."

I know that computer companies generally have pretty bad technical support - at least, that's what I've found with a number of them. But this actually makes most of them look good. The problem is that Dell apparently sees customers as cattle waiting for slaughter. A few years ago, at the height of the company's reputation among investors and a fawning press, I predicted that one day magazines would run the major story, "What Ever Happened to Dell?" However, I was thinking in terms of how the company has tried to drain dry the money from its own supply chain. This is even more extreme.

No Money in Web 2.0

The Financial Times did a piece on the underlying profitability of "Web 2.0" and came to the conclusion that it isn't:

Many members of the Web 2.0 generation of Internet companies have so far produced little in the way of revenue, despite bringing about some significant changes in online behaviour, according to some of the entrepreneurs and financiers behind the movement.

The shortage of revenue among social networks, blogs and other “social media” sites that put user-generated content and communications at their core has persisted despite more than four years of experimentation aimed at turning such sites into money-makers. Together with the US economic downturn and a shortage of initial public offerings, the failure has damped the mood in Internet start-up circles.

Well, there's a surprise - companies banking on exciting technology are unpleasantly surprised when customers don't find it quite as intriguing. Features aren't the same as benefits, and the value the seller perceives may not be the same as what the buyer perceives. As "cool" as something might be, a company could find - they do find - that no one is interested in spending money on it. You'd think that people might remember the dot com bust, which was only seven or eight years ago.

What gets confusing with the Web 2.0 apps is that many seem so popular. So why don't they make money? Again, it's the perceived value, at least in part. But I've begun to wonder about the underlying psychology. People are used to being social without payment: they go to parties, chat on the phone, talk to a neighbor, and exchange recommendations with friends. The habit is, what, at least tens of thousands of years old? People assume it to be an essential right, and in that case, why would you pay for it? Now you're back to advertising, and that means that companies must decide that they can sell to the audience. Sounds like waiting for Web 2.0 success might take some time more, perhaps when Web 3.0 emerges.

If You Can't Buy Yahoo, Maybe You Can Buy The Customers

Microsoft is trying to pay users to shop online with its Live Search. According to a BBC story:

Under the cashback service, the software giant promises to pay back a portion of the purchase price of anything shoppers buy online from any of its 700-plus selling partners who are offering more than 10 million products.

Among the big box retailers who have signed up are Barnes & Noble, Sears, Overstock.com, Home Depot, J&R Electronics and a host of others.

Money will be paid either via PayPal, a cheque or into a user's bank. It will only be open to people living in the US.

The story then quotes Om Malik, a tech heavy weight and founder of GigaOm, as saying, "This is not going to affect Google. Google is so much better." I'd have to agree that it's no great shakes, but more because I think it's simply a bad business idea.

This is not the first time Microsoft has tried paying users to switch to its search technology. Last July there was a report on how it had fared. My comments then still go: this is bribing consulers, and the result is attracting only mercenaries who will be gone at the hint of the next offer. The only way you keep them is to keep increasing the incentives. In short, paying people is a tacit acknowledgment that you offer nothing else they might value. That means the cost of maintaining the customers will be extremely high and they will feel virtually no loyalty to the vendor, just loyalty to their billfolds.

Now lets add the new wrinkle. This is money back for purchases made from searches. Given that Microsoft wants huge markets, they are probably assuming that this should be a big part of the search business. But how often does a search end in an immediate purchase? I'm guessing fairly seldom. People and companies buy according to their own schedules, not to the seller's. What if they use search to get information and eventaully get around to buying days, weeks, or even months after? Google keeps that business and that means so many more times to help tie the customer close.

Furthermore, if this was such a good strategy, why didn't it work so well when Microsoft started it last year that they didn't need to try and buy Yahoo? What Microsoft needs is not an old strategy based on where they were, but a new, forward-looking stategy based on where they want to go. The more they stick with the old playbook, the more they are stuck in an old game, while Google and other companies are in a different open field using different rules.

AOL Time-Warner Merger A Crock From Day One?

Bloomberg has an interesting story: the SEC is suing some former AOL execs for allegedly overstating Internet advertising revenue by more than $1 billion between 2000 and 2002:

In mid-2000, before AOL completed its $124 billion takeover of Time Warner, the Internet service provider began overstating revenue by paying more for goods and services in exchange for customers' ad purchases, the SEC said. The company agreed to pay $300 million in 2005 to settle a related regulatory probe.

Interestingly, the whistleblower, called as a witness in a number of cases, is also being pursued by the SEC. Now that seems plain silly. You'd think that the SEC would want to encourage people to come forward, and it sounds as though someone needed to at the company. Now what are people going to do in other companies? Help hide anything because they don't want to be held accountable?

Microsoft Won't Take No For Answer

According to at least a story in the Financial Times, Microsoft has proposed to Yahoo something between a partnership and full buy-out. The subject of speculation is whether Microsoft is trying to buy Yahoo search.

Even though Google is huddling over what to do, as they find the combination threatening (and want to partner with Yahoo themselves), I don't see why. They might lose the revenue opportunity that advertising on Yahoo search might bring, and that would be a pain. But there is nothing that Microsoft would add to Yahoo search to make it particularly enticing. They can't integrate it into Windows because of their past anti-trust dealings, and if they had something compelling for users, you'd think it would have come out on MSN already.

Microsoft continues to push only because it doesn't know what else to do, and management there isn't willing to encourage real innovation because, well, it's not guaranteed to be a blockbuster. Here is where Microsoft could learn a whole lot from the old IBM. Not bloated bureaucracy - the Redmond company already has that in spades. No, it's the concept of a research lab that can hit on not just innovation, but out and out new concepts. They could even do it in software alone and fund it for what would be a song to them. The current state of affairs is management by fear. Perhaps the company could use someone at the top who is a little bolder. It will take some daring to move in some direction, because change is inherently threatening to the old order, and so far the company has communicated that it wants to stay exactly where it is.

The Follies of Portfolio Theory in Risk Management

As the price of gas starts to approach that of cheap wine, foreclosures hit a record, and companies find themselves unable to get the loans necessary to do business, I think again of portfolio theory in corporate risk management. I mentioned this a while back as a response to an article by Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable. But today I started doing some rough calculations. One of the problems with complex mathematical models is that they have to simplify to make things easy for most people to understand.

However, sometimes there are simple calculations that can show you the potential folly of your ways. Assume for a second that in the financial world, there are, at any given time, 20 things that could go horribly wrong and wreak havoc. Say that the chance of any one of them occuring is only half a percent. Pretty low odds, right? Yes, for each given event, there is only a 0.5 percent chance in a year that it could happen. But remember that there are 20 of them, and because they are independent, they have a multiplicative effect. But 0.5 percent chance of going wrong is the same as 99.5 percent chance of going right. But when you multiple 99.5 percent by itself 20 times, you end up with about 90.5 percent. We've just gone from the psychology of safety in only a half percent chance of disaster to a more sobering 9.5 percent chance. Take that over a decade, and you see numbers that would make you bet the financial world would implode to some degree.

You can quibble with the percentages, or the number of disaster factors, even though I'd say I'm being pretty reasonable. So change some of the percentages, or the number of disaster scenarios. You're still left with the fact that, over time, the world will periodically drive itself into a brick wall at high speed.

I remember interviewing ChevronTexaco CEO David O'Reilly a few years ago. At one point I asked about geopolitical factors, as those are a problem in the oil business. He said that over time, there's always some war or political unrest that affects their business. The company just assumes there will be one at any given time and figure out how to live with it. If more companies should take that attitude, the world might be in far more secure shape.

MicroWahoo is a Corporate Disaster

They want to do a deal, they don't want to do a deal - the only way to figure out where the two companies have been going is to find a lower-case "o" oracle. I think that the CEO and board at Yahoo are now toast because they turned down a major premium on a stock price that hasn't yet heard a value low enough to make it satisfied. Push will come to shove, and look for either major resignations or institutional investors to push for a dissident slate of directors.

As for Microsoft, if the Yahoo deal was that important, what happens to Ballmer for not being able to make it happen? I'd ask if there was a plan B to find a direction for folks in Redmond, but I think that the Yahoo pitch was just whistling in the dark, because it was essentially an approach that was a me-too-more-of-the-same strategy. In other words, they aren't moving anywhere and probably won't be in the near future. Of couse, there is that little probelm of needing to protect the revenue base of Windows and Office.