Yet Another Investment Scandal: Duping Investors

I know it must be hard to believe, but there's more evidence that when financial services companies have conflicts of interest, they tend to pay more attention to their own than to those of clients. The New York Times reported yesterday that Massachusetts has turned up evidence that USB was deliberately trying to foist risky securities that it and its employees owned onto individuals:

Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. They have long-term maturities or, in the case of the preferred shares, no maturity dates whatsoever. The securities are issued by municipalities, student-loan companies, closed-end funds and tax-exempt institutions like hospitals and museums.

In mid-February, the $300 billion market for these instruments collapsed, trapping investors who had been told that they were safe and easy to cash in — leaving both wealthy investors and those of modest means unable to finance their small businesses, buy homes, pay college tuition and otherwise use their money as they had planned.

Although USB is denying it, Mass. secretary of the commonwealth Bill Galvin's office apparently uncovered some blatant emails. Read the story (at the link) to see some of the panic that knowingly ran through the company as it wanted to dump inventory - and that some emails by brokers themselves suggest that they felt they were being kept in the dark about real risk as well. If it really was cash equivalent, as they allegedly claimed, then why was it so hard for them to get cash? Could they be ... lying? Maybe: were their fingers typing?

Blogging on BNET, Too

In addition to my other blogging mania, I'm now covering the high tech industries at BNET, the business news and opinion arm of CNET.

The Fed in an Insulated Nutshell

The Washington Post has a good editorial on the Fed that explains a lot. Yes, it's been worried about the credit crisis, but it's always worried about something, and that has kept the U.S. central bank from significantly raising interest rates for years. "No worry of inflation," it has claimed. Guess what? The Fed's definition of inflation comes with a pair of blinders:

Every American who drives or shops for groceries understands this [that prices of food and energy are soaring], except at the Fed, where they bow before something called "core inflation." This is a way of measuring prices without including food and energy, and so we are supposed to take comfort that "core inflation" is rising at only a 2.3% annual rate. Yet it is the Fed-induced price spike in food and energy since last August that has Americans in an uproar and Congress in a panic that may yet produce major policy blunders.

In other words, the Fed ignores some of the most potentially volatile basic commodities that there are.

In some sense, I can understand the impulse. When you want to see a trend, it's a common enough practice to eliminate wild variations to get an overall pattern and not go off on a quest after what is only a transitory effect. By the time you change policy, and maybe pass legislation, the variation is over, or moving in another direction, and you've committed yourself to a course of action that will now have an effect other than what you wanted.

But we're talking about oil more than doubling price - possibly tripling - and food prices that, experts say, are going to be up for a long time, possibly a decade. Changes this high, or that will go on for that long, are more than transitory, because they have a transforming effect. It could be enough to shift the economy from one steady state into another - an older term for the more fashionable "tipping point" phrase that represents the same well-established engineering concept.

One big factor in the price rises, and the overall shakiness of the economy, is the weakness of the dollar, and, as my feeble brain understands it, that results from pumping money into the system and keeping interest rates too low for too long so those who have money aren't screaming at you that they cannot borrow even more money cheaply enough.

Maybe borrowing is over rated. Yes, it's convenient, and, yes, it can make certain types of transactions possible. But there are a lot of companies with enough profits to invest sizable amounts into their new ventures. It's called capitalism, folks - you make capital and then you invest/risk big chunks of that to get to the next place. Those who want assured profits perhaps should be apprised of the nature of the endeavor. Real wealth comes from long-term investment and building, not from squeezing every possible dollar out of the business.

Instead of appeasing the loud cries, the Fed governors should grit their teeth and do the hard work that is necessary. Yes, people will scream and call for their heads, but they took the job, and it's their duty to take the actions necessary for the long-term health of the country. When you hear from person after person wondering whether they will be able to afford to heat their homes this winter, it's not healthy.

Product Review: Jott

As part of testing another online service, I've been trying out Jott, and am impressed. It lets you dial up a toll-free (in the US) number, pick out a recipient from a contact list you've supplied, dictate a message, and have a transcribed version zip along via email to the destination. You can't dial it from just any phone; you need to register the numbers you'll be using with Jott. That could be a problem if you aren't calling from your usual cell. I tried calling from my home number (don't get out much, anymore) and sending messages to myself. Before you write that off as quasi-pathetic, remember that there are plenty of times you'll think of something when traveling and you'll want to make sure you remember. Instead of jotting a note, you can Jott an email. Simple messages worked well, so I decided to try something complex without taking the time to spell difficult words:

My eyes are fully open to my awful situation – I shall go at once to Roderic and make him an oration. I shall tell him I've recovered my forgotten moral senses,And I don't care twopence-halfpenny for any consequences. Now I do not want to perish by the sword or by the dagger, but a martyr may indulge a little pardonable swagger, and a word or two of compliment my vanity would flatter, but I've got to die tomorrow, so it really doesn't matter!

It's from the patter song in Gilbert & Sullivan's Ruddigore. Here's what I got in the email:

Note: We had difficulty understanding some parts of this message. Please Listen to the original message [this part is a link to the actual recording] if some parts are unclear.]

My eyes are fully open to my awful situation. I shall go at once to Roderick and make him anoration(?). I shall tell him I've recovered my forgotten moral senses and I don't care to pen(?) sap(?) penny(?) for any consequences. Now I do not wish to perish by the sword or by the dagger, but a marker may indulge a little partanipple(?) swagger and in order to have compliment my vanity would flatter, but I've got to die tomorrow. So, it really doesn't matter.

A bit unintentionally humorous toward the end, but pretty good, and paired with hearing the original, you could certainly get the message. You cannot enter contacts on the fly, so if you suddenly needed to send an email to someone new, you're out of luck. But there is plenty of utility in this.

You can also send messages to various services, including Google, Blogger, and others, including some that manage projects and collaboration, reminder services, Trapster (alerts about speed traps), and T-Sheets (a time tracking system I'll review).

During the beta phase, and I don't know how long that continues, Jott is free, so no reason not to give it a shot.

SEC Chief Can't Win for Losing

It must be tough to be the head of the SEC, when you know that you'll always be under a microscope - and gun. Business moaned and complained about Sarbanes-Oxley, how regulation would be the death of business on this continent. (Notice how profits are doing pretty well, thank you very much?) Now Christopher Cox is getting pummelled over not having a higher profile during the Bear Stearns financial crisis. Of course, it was the Fed that had to pull the bank out, and Congress that has to deal with how to better regulate the industry (and maybe, who knows?, go back to some of those old deposit requirements that seemed to work so well). I think the problem is that people want someone to blame - anyone. Businesspeople are just regular folk, when you get past the bespoke suits and expense accounts, and they get scared when the entire framework of their world quakes. But I'm not sure there is a happy or short answer. Regulation may work for a while, but will eventually fail as people forget why it was put there in the first place, or someone locates gaps that let them do as they wish. And when things go wrong, we can only blame ourselves. Perhaps a bit less yearning for something from nothing might go a much longer way to sanity.

Forbidden Fruit at Apple: High Developer Salaries

There's a site called Glassdoor.com, which lets people find out what their peers at other companies make if they willingly provide their own salary information - plus get ratings on and reviews of companies. What an instrument for corporate mischief, and showing that potential is the blog TechCrunch, which compared software engineer salaries and bonuses at Google, Microsoft, Yahoo, and Apple. Interestingly, Apple without a doubt - assuming that people are honest - had the lowest average compensation for programmers: $89,000, versus about $105,000 at Microsoft and Yahoo and just over $112,000 at Google. And then you get comments like the following about Google:

If you enjoy your individuality and time alone, Google is not the place for you (keep in mind I’m not an engineer). Google pushes a highly “googley” atmosphere, which is something akin to what the Brady Bunch would be like if they lived in communist Russia. . . . People are encouraged to have googley attitudes, wear plastic smiles, and not to question the infallible nature of the executive management group. . . . If you like feeling awkward during forced group activity, Google is your haven. It isn’t exactly “forced” (no guns), but if you don’t participate you become labeled as “ungoogley.” Once deemed “ungoogley”, you’re practically viewed as a rotten apple that threatens to spoil the bunch.

HR officials at most high tech companies must be shaking at the thought of what salary reviews and negotiations are going to be like in about two years.

US Financial Groups Face Parmalat Backlash

Parmalat spells disaster in Italian much the way that the US can substitute the word Enron. It was an unmitigated fiasco involving 14 billion euros of debt and some very unhappy investors. But the Europeans are obviously learning something from their American cousins, because they're heading to court in a class action suit, according to the Financial Times, and going after the only people left with pockets of any size: the financial institutions and auditors - such as Citibank, Bank of America, Deloitte & Touche, and Grant Thornton - they think must have known about the precarious situation because, hell, it's inconceivable that these savvy organizations could have messed up that badly.

A year ago I might have agreed, but now I can only think of a quote from the movie The Princess Bride. Wallace Shawn's maniacal character Vizzini keeps calling every setback "inconceivable!" Inigo Montoya, played by Mandy Patinkin, eventually says, "You keep using that word. I do not think it means what you think it means."

Given the real estate bubble, it seems all too conceivable that people running money shops of various kinds are quite capable of flushing tens of billions of dollars down the nearest storm sewer while blinking in a confused way. "Inconceivable that we [they] could have screwed up so badly!" Or not.

ExxonMobile Tries Dodging PR Bullet

It's tough when your own business processes and success come back to bite you. That's exactly the picture that the Financial Times has painted for ExxonMobile selling off its 2,200 company-owned service stations. (Here's the link, but it does require a paid subscription.) The problem is having the company name sitting above those big $4+/gallon price signs. The paper does make one point I've been considering - that oil companies may make a whole lot in gross dollars, but the real price setting comes at the well head, not at the pump.

However, let's take a look at the ExxonMobile financials for a moment. When people have criticized it for windfall profits, it has argued that its prices have gone up as well - which is true, as the company buys gas from nations that own their oil. But look at the income statements from the last three years and you see an interesting pattern. If costs had gone up equivalently with profits, then the operating income should have been roughly the same as a percentage of total revenue.

In 2005, operating income as a percentage of revenue was about 16.4 percent, with net income before taxes being 9.7 percent. In 2006, that jumped to about 18.3 percent and 10.6 percent. And in 2007, the numbers were 17.8 percent and 10.0 percent. In other words, yes, the company has managed to raise its net income slightly. But even if you look at operating income, not net income, the jump is under 2 percent. A low price for regular gas in my neck of the woods is about $4.05 a gallon. Cut 2 percent and you get about $3.97 a gallon - a savings of 8 cents a gallon. Sorry to disappoint everyone who wants to raise taxes on "unjust" profits, but all that will do is transfer some of those profits to the government and not lower prices at the pump.

The LA Times: When Investors Should Stop Trying to Run Businesses

I wrote about the LA Times Magazine story on my blog about words and writing. However, it turned into a business rant, so I thought a link here might be worthwhile.

Why Free Software Is Such A Big Deal

People have come to expect certain types of software to be free - like browsers. In fact, that's how Netscape started, making its software available for nothing. Eventually Microsoft beat them back with its own browser, Internet Explorer. But interestingly, the free browser wars are not over, according to a story in Computerworld quoting a Net Applications' study:

Mozilla Corp.'s Firefox browser is on pace to hit the 20% market-share mark next month, a Web metrics company said today. Firefox boosted its share by 0.6% in May, accounting for 18.4% of the browsers used during the month and putting it within shouting distance of a major milestone, according to Net Applications Inc. "Firefox is trending to hit 20% market share sometime in July," said Vince Vizzaccaro, the company's executive vice president of marketing, in an e-mail.

This is fascinating, not because someone other than Microsoft can give software away, but because in doing so, a company can take so much market share. It's another sign that the Redmond-based corporation needs significant change and some direction that stresses real invention.

Companies Paying Bond-Holders "In Kind"

In the non-profit world, there is a term called "payment-in-kind." That means an individual or company has supported a non-profit not with cash payments, but through donations of goods or services that the non-profit needs if it is going to operate. But when you bring payment-in-kind to the world of investing, you might also bring along the non-profit label - as in, this can be a great way of making nothing. According to the Financial Times, many companies have sold bonds with a PIK feature that allows borrowers to pay bondholders with shares or bonds rather than cash.:

During the buy-out boom, Standard & Poor’s Leveraged Commentary & Data estimates 43 bond deals were done with a PIK feature. Some analysts suspect, however, that the actual number was higher.

And now some of those companies are turning the concept into practice. This should be pretty damn disturbing to people who lend money to corporations. It's a credit crisis of a different kind.

In the past, when times were flush (at least on paper), companies often did not want to dilute ownership and its control and value. But what happens when a company can say, "Oh, that money we owed you? Here's another bond to make up for it." The bonds then effectively become IOUs, and when you expect to get cash, instead there is more paper. Companies may avoid default, but to what end? This turns credit ratings on their head, since, I'd argue, this lets borrowers effectively walk away from obligations in a legal manner. If compaies can, then often they will - and if they do, then the credit ratings that attempted to quantify how safe an investment was become meaningless.