The Case Against Rounded Corners

Apple Inc (NASDAQ: AAPL) stock dropped by over 40 points in trading yesterday. With its 940 million share float, the 'arithmetic', as Bill Clinton would say, adds up to about a $36 billion loss in market capitalization (actually, Clinton talks of the math not adding up, but I am simply using the form used by the President). Going back to September 18, 2012, Apple stock has quietly lost 163 points, or, $153 billion in market cap. This loss in shareholder value is just shy of the total market capitalization of Oracle Corp (NASDAQ: ORCL) - $154 billion!

Apple introduced the much hyped iPhone5 along with iOS6 on September12th. Some devout followers (and most hardcore FruitHead haters) will remember that 'The 5th' garnered well over 2 million units in pre-orders within the first 24 hours of its launch/announcement. For interested readers, here is the video link to the iPhone5 announcement: http://bit.ly/YRxhhZ. This is a 1 hour 42 minute video, so I will highlight a few moments with bookmarks:

0:8:00: Nothing new about the iPad, but Tim Cook, CEO, discloses Apple has sold 84 million units to date. That is roughly 30 billion in profits at $400 per unit, on average. Cooky also throws in a dig at 'other' tablets.

0:11:00 - bragging about 700,000 Apps on the App Store

0:12:30 - Phil Schiller, head of marketing introduces the iPhone5: a bit taller, thinner and lighter than the iPhone 4s. 20% lighter, 18% thinner. Retina display. More Apps on each screen (5 rows). More pixels on screen. LTE. A6 chip. Blah, blah, blah. Schiller goes on for a full 24 minutes before revealing - wait - the 'lightning' connector.

Apple just made all your investments in docking and charging devices useless, unless you go buy that 30 pin to lightning adapter.

0:40:00 - iOS6 introduction by Scott Forestall. First up - new Apple Maps App: "Beautiful turn by turn directions". Flyover mode with satellite imagery. Google Maps is no longer supported.

Rest of the video is more 'rah-rah' from Apple staff, along the lines of 'I, too sexy for myself'.

For my taste, I like the following video better: http://bit.ly/RJi538. It is a candid look into the lies, bending the context, and hype-in-overdrive that was belted out during the keynote. Or, this:http://bit.ly/MvvbzL, a critical look at what if anything (hardware) Apple has invented.

The real truth, however, came fast and furious - the Apple Maps App was, and continues to be, broken. It was sending people to the middle of nowhere, even for simple addresses. And, though Cook has since apologized, and Forestall was fired, Apple has not made any concessions to customers who purchased the 5. Then there was the unusual case scratching, explained by Schiller as 'normal'.

I have written earlier about 'iOS: Idiotic Operating System', to showcase how Apple treats customers. I am not out of options/recourse on that, yet, so I will refrain from adding to that conversation. 

Apple is also embroiled, around the world, in lawsuits over so called patent infringements. The substantive argument Apple makes is that it owns the patent on rounded corners, hence no one can sell tablets as such. Bold and audacious indeed.

Truth, I believe, is that Apple is firmly controlled by the bean counters, the lawyers, and the supply chain folks - Cook is one of them. Finally, for all my progressive friends who give a damn about exploitation of labor in China, and elsewhere, read up on the horrors at FoxConn, Apple's primary assembly chop-shop in China.

Apple used to be the innovator, and they brought some great devices - both in design and utility to market. It seems, at least to me, now that Apple is headed in a whole different direction - one where customers do not count for they are like sheep to be herded, where product quality is of no concern, and where innovative competitors must be crushed in courts - all for its own last dollar of profit.

Citius, Altius, Fortius has served the Olympic spirit well. I doubt a mass retail electronics distributor, even the great Apple Inc., can survive on that model alone in the long run.

Case Closed.

PS: Lest readers think I am just another Apple basher, and for full disclosure, I will admit that as of today I own more iOS than Android devices. But that balance is changing, and it is changing fast.

An Open Letter for Ashok Khemka, and for all of India:

Dear Ashok,

I always believed, during my teenage years through middle and high school, and during our time at IIT Kharagpur, that notwithstanding the authority, respect, lifestyle, power, and privileges afforded to India's IAS (Indian Administrative Service) cadre, the Service, and, perhaps, in a larger context, the nation was spiraling down the vortex of doom in a self-fulfilling prophetic way.

The Government of India goes to enormous lengths - the UPSC's (Union Public Service Commission) application process, written examination testing across 2 subject majors (unless that has changed now), and its selection interview process to identify and select India's 'Best and Brightest' into the IAS cadre.  

I also spent some time in Musoorie, India, (during the 1980s), at the IAS training campus, and I was very impressed with the post selection training program the Indian government had established for the civil services. The government's investment in recruiting, selecting and training of the IAS cadre (and other civil service cadres) is absolutely necessary and warranted, for the - the IAS cadre was designed to administer a nation of a Billion plus people in the 7th largest country (by geographical land mass) and the 2nd most populous country on Earth.

I decided to walk away from even trying for the IAS service opportunity because of my grave personal concerns about the ability of an individual IAS officer to stand up to, and the change the system, despite my firm belief, even back then, that the service and the system were seriously in need of large scale changes and reforms. Both continue to seemingly suffer from want of such true reforms (despite the socio-economic reforms, in India, of the last 20 some years).  

I had come to truly get to know you as a young man, Ashok Khemka, not just as the brightest young man on campus (trust me, despite his PGDM, the 'other guy' could not hold even a dim candle next to you, even on his best day), but also as one of the most decent, honest, sincere, and 'straight-up guys on campus. We traveled together a few times and I can still recall our conversations. I remember visiting your family home in Calcutta (or, should I say Kolkata), eating a meal with your family, and discussing issues of social and economic concerns across India.  

I knew, at the time we graduated, that you were different from most, and that someday you would change the world. But, that thought was in the context of your education in Computer Sciences, and about you developing some super-cool mathematical algorithm that would solve some extraordinarily complex challenges - the next C. V. Raman, Subrahmanyan Chandrashekhar, or the next Stephen Hawking. 

About 20 odd years ago, I was surprised, and quite shocked, when I learnt about you joining the IAS cadre.  I believed then Ashok, that the system would beat-up your spirit, and bend you to its will.  I did not think, that any individual IAS officer who dared to try to change the system:  to stop corruption, bribery, favoritism, political nexus based exploitation of the nation, in order to serve and protect citizens, and the country, would inevitably be crushed and destroyed by the system – the politicians who IAS officers report to, and the IAS cadre itself.  The cadre, you see, has always had, and continues to have, an ample population of ‘rotten apples’ - those that benefit personally, from acts of omission and those of commission, that enable ‘grand-mal-intended-schemes’ and plots of politicians, and of corrupt businesses.

During the course of the last 20 odd years, I have watched and read about the 'Indian Economic Miracle'.  But, more importantly, I have also followed reports of rampant corruption across most Indian theater: the elected politicians, members of the cadre, and increasingly, opportunistic individuals who bend and abuse the system to gain advantage for personal gain. 

The Indian psyche is seemingly stuck, as if Indians were still under Imperial Colonial rulers when people lived in fear of the British administrators - the Collectors, and the Civil Law Enforcement officers of British elk. The Indian mind, it still seems, is trained from birth to be in awe and fear of authority figures - civil servants, et al.  

Combine that with the inherently selfish values of humans in general and the “Jugard” (the Hindi word for as in making arrangements, legit or otherwise, to achieve a goal most expeditiously and to one's own sole benefit) and expediency based values of Indian people, most of whom only seem to care about 'getting their own personal matters expeditiously resolved, and you have a potent mixture of opportunities for mass exploitation, and, I believe, eventual self-destruction of the democracy, to be replaced with horrors of unimaginable proportions.  

Only this time, the new rulers, of the Indian landscape, will be from among its own people – people of power, privilege, money, and of opportunity, out to accumulate more of the same at any and all costs to the country and its masses.

India's history is, and should always be a reminder that some Indian(s) has/have repeatedly sold out, inviting new dynasties and rulers to occupy and lord over her for hundreds of years.  This is a lesson that cannot, and should never be forgotten, for what is at risk is the largest true democracy in the World, and the Freedom (and all the civil and constitutional rights that flow from being a free country), that was so hard fought by our grandparents and their generation.  

Note: Indians forced the Imperial British to voluntarily leave the country - without a protracted civil war, and without mass bloodshed, because the Indian people collectively, and in sufficient numbers, decided they had had enough of the exploitation, the racial discrimination, and the lack of opportunities that came with being a subject of Her Majesty, The Queen of England.  The Brits did not just get up and leave because the their subjects wanted them to.  They dug in their heels, and retaliated with brute force.  They killed innocent men, women and children.  They threw thousands in to jail. For any reason.  For no reason at all.  However at the end, Great Britain had no choice but to leave a country they had ruled, raped and exploited for over 200 years, because they were no longer welcome, and they realized that they could no longer keep the Indian aspirations of Freedom, Democracy and Equal Rights and Opportunities under Imperial denial.  

But, I digress, and thank the reader for staying with me.  A more detailed note on the British Empire is coming.  Soon. That is a promise.

A national economy that was massively regulated by the Federal government, and State run Enterprises were perhaps the only prescription to India's dilemma of severely under developed industry and infrastructure that was, in 1947, in shambles - both a gift of the British rulers.  

I have always held Pandit Nehru’s vision for Indian economic development in high regard, but I have also always had trouble accepting the rational of allowing any elected politician (and not just the Prime Minister) the power to control the careers, lives, and destiny of career IAS officers.  

The average Indian politician, today, is nothing short of a hooligan, and a gangster - most of them lack even the basic education, a fact that is perhaps masked with fake college diplomas and degrees that are illegitimately obtained by force of intimidation, or though bribery.  A majority of these village- idiots are quite simply ignorant, and do not have any particular vision or passion that motivates them in to entering Public Life, except their grand design and desires to accumulate wealth and power.

The cadre itself suffers from the 'Orphan Syndrome': while IAS officers are selected by the Federal apparatus (yes, there is a parallel system of state level civil services, but the scope and authority of the IAS officers dwarf those of their state counterparts) and they are assigned to states across India.  All of that is fine, except: the system gives state level ministers the power to assign and reassign IAS officers, at the politician’s whim and fancy.  Even the most insignificant, and inevitably the most corrupt link in the system – the politician, is handed a sword over the lives and careers of the ‘Best and Brightest’.  As a human being with the need for security and safety, even the most upright IAS or civil servant is thus under constant pressure to bow to political master-class.  No one likes to be shunted around jobs, deputations, and different cities across their designated state because the personal upheaval is too enormous.  

I can understand shunting around poor performing officers, but this power structure creates distortions and disruptions that are hurting the country, its citizens, and the IAS officer who dares to make a principled stand against a corrupt nexus between businesses and politicians.

I became aware of the massive public controversy that erupted, last week, in the State of Haryana, India: Ashok Khemka, IAS officer, was reassigned within a few months of taking charge of enforcing, among other things, laws related to government land control – the purchase and sale of government lands to private parties.  Khemka had apparently discovered massive irregularities in land purchase, and sale/transfer transactions between a Mr. Robert Vadra, an Indian business man, and DLF Corporation – one of India’s largest, if not the largest property developer: Mr. Vadra apparently received advanced payments, from DLF, in the millions to purchase ‘farmland’.  But, he was only the front-man: the property was promptly and illegally converted to ‘commercial’ land use status, and sold to DLF, for an estimated 19 times what Mr. Vadra apparently paid for the farmland.  All of this transpired in a short period of about 3 months.

That is a Bribe, if there ever was a Bribe! It is, as they say here in the United States - "Pay to Play" economics.  It is abhorrent, and even in India, it is illegal.

 

On the face of things, Vadra is not a bad investor now, is he?  1900% returns over 3 months, or 7,600% annualized! Perhaps Vadra should immigrate to the United States and help us manage our property woes across America!  

Vadra is no investor extraordinaire though.  He is married to Priyanka Gandhi, the daughter of Sonia Gandhi, the President of India’s Congress Party, and Rajiv Gandhi - son of Indira Gandhi, and grandson of Pandit Nehru, all three being former Prime Ministers of India.  

The patriarch, Nehru, was a Leader and a Statesman of extraordinary caliber; Indira Gandhi, despite her brazen and paranoid acts of fascist proportions during India’s “Emergency” of 1970s, at one point was hailed as “Indira is India and India is Indira”, and Rajiv Gandhi was the leader who set India’s economic wheels of freedom and regulatory reforms in to motion.  

India now has to contend with a dying dynasty without a moral compass, led by the former Italian citizen – Sonia Gandhi, her son Rahul and daughter Priyanka, both rumored to be mediocre leaders at their best.  If they are leaders at all, that is.

 

Given the power and influence of the Gandhi family, in India, even extended family members – Vadra – are out to make the most, as in financially raping, pillaging and looting the public and the country to accumulate vast personal fortunes.  It is estimated by some that Vadra is worth a cool 2 Billion.  That is in US Dollars!  Clearly, his handicrafts based export business did not generate such wealth.  The recent DLF transaction, in it of itself, netted a tidy USD 10 million for the Vadra family. DLF, I am sure would erect yet another mega mixed-use complex on this piece of land and rake in a pretty penny for itself.

Unfortunately, the transactions came under the purview of Khemka.  Knowing what I know about Ashok, he cannot be bought.  Khemka immediately initiated a formal investigation into the land deal transactions of Vadra. The following day, he was ordered ‘transferred’ out of the land control office by the Chief Minister (in the US context, Governor) of Haryana, Mr. Hooda.  Hooda, of course, is in political bed with Sonia and her Congress Party.

Khemka, on his part though is a tough cookie – prior to handing over his official duties and while still vested with the authority of the land control office, Khemka issued orders that effectively nullify the most recent Vadra-DLF transaction.

So, a corrupt system has finally and in a very public manner collided with a truly principled IAS officer.  The Federal and State government are now actively trying to destroy Khemka.  As if his 43 previous transfers in 7 odd years was not enough!

From this point on, Ashok, you will be publicly humiliated.  You and your family will be threatened, and may even suffer harm.  You have put yourself in grave danger because you chose to take on the Gandhi family.  You will find, soon, that none of your IAS colleagues will support you, or want to continue to associate with you.  The isolation that is coming will be complete.  You will face enormous vilification through media.  Your health will suffer and you will have to deal with ever increasing levels of mental stress.

I never doubted, Ashok, that someday you would change the world.  And that moment, it seems, has arrived.  It would no longer serve you, or the country, for you to continue to be a part of the apparatus. Trust me Ashok you have made me extremely proud today.  The mere fact that I knew you in college is an honor.  But, you, and only you have to bear the enormous burden of not letting this firestorm overwhelm you.  

I know you are one of the smartest people in the World.  Put that brilliant mind to work, and put that spirit you have to the cause of ridding India of the malaise of rampant corruption in public life.

I know you can do it.

-from an old time friend.

On Tax Amnesty and Running for Office

Did Mitt Romney receive a Tax "Amnesty" from the IRS?

UBS, the 'Giant' (or, shall we say the 'Monster') Switzerland based Investment Bank paid $760 million in 'fines' to the US Government, in 2006-2007, after a prolonged legal fight, to settle potential criminal charges for aiding & abetting Americans taxpayers into criminal tax shelters, aka undisclosed numbered Swiss Bank accounts. 

US tax law is clear: one MUST disclose 

all income, regardless of its source, and pay federal taxes on ALL income.

Tax-Shelters do exactly what shelters do - provide a facility where current income is sheltered from purview, and deferred indefinitely for tax purposes.

So while the 'Magical' Swiss Bank Account Number is available for spending money, none of the income is reported to the US IRS. Hence the taxpayer has no LEGAL obligation to report such income.

Alongside paying fines, UBS also handed over identities of 4,000 US citizens who had availed themselves of such services. The IRS began reaching out to everyone on this list and offered an Amnesty deal: Pay the taxes owed plus a 20% penalty on the gross cumulative undisclosed income, in exchange for Amnesty from criminal prosecution.

For the uninitiated, Al Capone was indicted, convicted, and served time - for not paying his taxes. The Feds couldn't pin anything else on him at that time.

America is still a place where "Due Process" is a constitutional right. So, each person in that 'Elite' group had to make a choice: take the Amnesty deal, or, roll the dice and have their day in court. By way of reference, the folks over at the IRS do play hardball - the penalty rate today is 27% for anyone who's not taken the deal yet.

Mitt Romney, remember, was running for the GOP nomination during the run-up to our 2008 Presidential elections, until he ended his campaign in favor of Sen. McCain.  

Over the past weekend, Romney release all 375 pages of his 2011 tax returns. While there are some interesting takes on Romney's 1040 for 2011 - the effective tax rate paid of 14 odd percent, etc., the real bomb of a story may lie in his 2009 returns which are not required to be released, and which have not been released by Romney.

We know that Romney had Swiss Bank accounts. Mysteriously enough, his 2011 returns make no mention of any assets in Swiss banks. Cayman Islands,yes. But not in Switzerland.  There's now plenty of chatter to outright dismiss the notion, that Romney accepted such an IRS Amnesty deal, as mere political mud-slinging.

Did Mitt Romney do a la Al Capone in not disclosing ALL his income? I am leaning towards the affirmative. And, if that is true, then Mitt has duped every Republican, of all stripes, in the GOP - in running for and securing the GOP Republican Party Candidate for President of the United States of America.

A criminal act in violation of US laws, not withstanding the Amnesty, must preclude such individuals from occupying any elected office. Forget about becoming the US President. If these allegations are true, Romney shouldn't ever be elected to ANY office - municipal, State, or Federal - in our country. Not even to his local Country Club Board.

Gotta say though Mitt, you got some Brass.

And, Justice for All

The wheels turn, as if in excruciatingly slow motion, and the proceedings are liberally interspersed with months of "standstill" to accommodate "motion practices" of Defense Lawyers, and in deliberate regard of Defenda

nts' "Due-Process" rights, but when the 'Good Guys' decide Enough-Is-Enough, the entire house of cards can come down:

Financial Fraud Enforcement Taskforce

Don't get me wrong, I am not uncorking my bottle of 'Moet Chandon' yet (sorry, 'Dom' - you are just way too hyped up and freaking overvalued). These 3 men (men they are, but only by their gender) of the house of UBS - Union Bank of Switzerland, convicted recently for their roles in financial crimes in the Municipal Arena, aren't even the proverbial 'Spoke-in-the-Wheel'; They are Minor-Minions of Wall Street, who manipulate the system and perpetrate criminal acts (in this case, on our civic municipalities). And, these 3 men are by no means an exhaustive list of such pin-heads, driven by sheer greed and willing to compromise everything. Just so they can claim a larger paycheck.

Their greed neither imposes, nor recognizes any bounds - social, moral, or otherwise, on their own behavior. They usually travel in packs, for at their core they are essentially opportunistic cowards. Like Hyenas, encircling us, our institutions, and our System, looking for the proverbial weak spots, the loopholes, and for 'like-minded' citizen officials of authority, or for middlemen with access and influence upon officials, and upon our institutions and our Systems.

These are men (in general, very few women of Wall Street are involved in such criminal enterprise. But, there are some. Recent cases remind me of the 'Sex Queen' of Hedge Funds, the one who was co-convicted along with her 'Men of Money' (Raj Rajarathnam, Anil Kumar, et alii) who bring their fraternal ways right out of college frat-houses, and into our lives. They seem to believe they are entitled, that they have earned the right, to a boat-load of money simply because they have a degree in 'Business Administration'.

Such values are fostered and further nurtured in the workplace, as most of them put in that obligatory and mindless 2 to 3 year 'Junior Associate' stint across Wall Street, and, across Consulting and Accounting type Corporations. This is when they encounter their eventual teachers and mentors – their 'Seniors' - the 'Made Men' (Any resemblance to the Mafioso worlds is entirely intended). who are slightly older versions of their own distorted 'Id', their uncoordinated 'Ego', and their dysfunctional 'Super-Ego'. The future criminal mind is conceived (or triggered), as witness to a variety of underhanded, and less than aboveboard shenanigans of their Seniors, that are rewarded instead of being discouraged, as they themselves go about their mundane responsibilities of 'Making Copies' and 'Stapling Presentations'.

Junior Associates are constantly encouraged by the system, to go get that MBA degree. Almost as if, if one wanted be a 'Master Criminal', one would need a Master’s Degree in Business Administration. So, off they go. To ‘Preferred’ schools such as Harvard, Yale, Princeton, NYU, Columbia, Wharton, Cornell, and the likes, GMAT scores and all in hand, begging for a slot, polishing up their 'Liar Resumes', more than likely forging References Letters, and almost certainly writing essays, as part of their application process, that convey a strong desire and determination to 'Change the World'.

No, I am neither a pessimist nor a cynic . There is a large body of MBA candidates who get in and graduate the right way, and for the right reasons, even among the 'Wall Street' wannabe crowds on MBA graduate school campuses. But the ones who truly end up changing the world are regular folks with ferocious determination and drive to do good, and not the obnoxiously vocal types that bring only couched and unbridled ambition along. I am yet to meet someone who has proclaimed "I want to change the world", and then gone on to actually do something about it. Talk and rhetoric continue to be free.

So 2 years in, and they graduate, with all the 'Power and Privileges' of the diploma bestowed upon them (I never understood the Power and Privileges bit). They graduate, usually with enormous financial baggage. Of up to $100,000 in tuition they paid over 2 years, and other accumulated living expenses, which can be in the 50,000 to 100,000 range. The pressure to make money is just starting.

Wall Street covets MBA graduates from the Ivy Leagues. I spent a bit of time on Wall Street, trading and selling derivative products. I witnessed roughly 10 annual rites of passage for freshly minted MBA grads – the recruiting season, the Super Saturdays, etc. I never understood Wall Street's fascination with Ivy League MBA graduates.

With the exception of a handful of recruits (over a ten year period), most of these Ivy League MBA wielding folks, in my mind’s eye, were completely worthless as Finance majors, lacking even the basic understanding and even a working knowledge of finance and economics. Listen, if you carry an MBA, with a Finance Major, and yet somehow are unable to calculate simple interest on a constant Principle, you need to surrender that MBA diploma. I shall refrain from speculating upon 'How' such MBAs got through the system.

And, I witnessed, first hand, what these people are capable of when presented with ‘Opportunities’ - Sheer Collateral Damage, to their clients, to their employers, to colleagues – subordinates, peers, and managers. It is almost as if they lay waiting for their ‘Moment’, waiting to strike, rip someone’s face off, and smirk it all off on their way to collecting larger paychecks, aka bonuses.

Wall Street also covets ‘Producers’. Despite most producers not having real management talent or skills, a disproportionate number of them ultimately end up at the top of the Wall Street’s internal food chain – as CEOs, CFOs, or, as Global Head of ‘Something-Something’.  

But, the road to such ascension is not inevitable. Despite their sense of being ‘Masters of the Universe’, and their accumulated wealth, sometimes the lawman catches up with their criminal misdeeds: A casual (albeit restricted) search for 'Municipal Finance Fraud FBI Justice Department' reveals a telling story. I knew a fair number of these now convicted felons. They happened to work at the same employer, during my time.  

Wall Street itself is a whole different animal. It is, today, metaphor (Yes, I am aware of the street named 'Wall Street', that runs East to West in lower Manhattan, from Church Street, to the South Street Seaport, that begins at a Graveyard, and ends at the East River. How prophetic). Wall Street is an ecosystem (see note on Ecosystems and Food Chains). Over the past 30 years, Wall Street has come to pervade every aspect of our lives. Wall Street is - Our Credit Cards, our Bank Accounts, our Car Loans, in our Homes through the Mortgages we have, our Education Loans, and in a global sort of way, in every aspect of our life where our money changes hands, or where we sign a contract to borrow/pay money. 

It used to be that Wall Street was restricted to our brokerage accounts. Everything else went through our bank. And our banks used to be institutions with integrity, worthy of our trust. Not anymore. Over those 30 years, our banks have turned into, or have been taken over by Wall Street.

So, we sort of understand why Americans lost their jobs, homes, credit scores, their savings, pensions, etc. When Justice does catch up, and at times it does, the perpetrators lose “Everything”.

Or, do they?

The Kiss of Isaac

He is now Hurricane Isaac, making landfall in Louisiana. SW Florida spent a couple of nervous wind and rain soaked days, with then TS Isaac lashing over the FL Keys, and drenching Miami, Palm Beach, Naples, Ft. Myers, Saint Petersburg, Tampa, and towns and cities across the FL panhandle.  Awesome power if one thinks about the FL peninsula - 577 miles from 'Land's End' to its Northern state line, and 140 miles across as the crow files, at mid-FL. 19 million folks live across the state.  And, while for folks back in India 19 million (or, 1.9 crore) is perhaps just another day in one of India's large metropolitan cities like Delhi NCR, Mumbai, Chennai, or Kolkata, 19 million in FL represents the 4th largest US state by population (behind CA, TX, and NY). Incidentally, fully a third (33%) of the US population (about 300 million) is concentrated in these four most populous US states. Coincidentally, these 4 states represent only 14% of the US 50 states' combined land area.  So tonight, FL breathes a sigh of relief.

For 4.5 million people of Louisiana though, and for those across the US with some ties to LA, and in particular New Orleans, the next 24 hours is likely to feel like eternity.  Hurricane Katrina hit 7 years ago, to the day, and, Hurricane Isaac made landfall at about 7PM Eastern, few miles South-West of New Orleans.

What happened in NOLA, in August 2005, in the aftermath of Katrina is an American national shame and disgrace.  The George W. Bush administration, paralyzed for 'whatever' reason, did NOTHING to send in Federal Disaster Aid, as large swaths of NOLA were being submerged. NOLA's poor, predominantly African Americans living in low lying areas (the 9th ward) were literally buried in watery graves for humans and animals alike. The Superdome, where the New Orleans Saints football team play home games, was the largest dome in America in 2005, and authorities seized upon Superdome as a 'Mega Hurricane Shelter'.  What transpired inside the dome is nothing short of bloody murder and unconscionable dereliction of our Government's duty to protect and preserve life.

Despite the insanity of bigotry and racism, overt or otherwise (yes, it is everywhere in America), on display during Katrina, New Orleans is a very special place.  While a lot of folks left NOLA for good in Katrina's wake, New Orleanians did return, and they have tried to rebuild their city.  Their beloved Saints are now former SuperBowl champions, having devastated teams across the NFL. Quarterback Drew Brees, the one that couldn't get a decent draft coming out of college, only to be picked up by San Diego and dumped by the Chargers in 2005, came to New Orleans in 2006, and took the Saints (the perpetual losers, derisively called the Ain't(s) across America) to its first NFL title.

Bobby Jindal, the son of immigrant parents from India, is presently Governor of Louisiana.  Jindal is Republican, and even though President Obama declared a Federal Emergency for all of LA, well in advance of Isaac's projected landfall, Jindal has been screaming bloody murder at the 'lack of adequate federal response'.  That is just politics, and it is after all RNC Convention week.  Jindal, at one point was rumored to be in consideration for the VP nomination, you see, so his political ambitions are young and perhaps raging enough for him to continue to live in denial of the reality of his home State's plight.

The spirit of NOLA cannot, and will not break because some bureaucrat, or politician, does not like the demographics of New Orleans. I have no doubt that the Obama administration will do everything the Federal Government can, to protect and preserve life across LA, regardless of color, race, or sexual orientation.

I hope I am right.

Good Night, and Good Luck

On Global Socio-Political and Economic Outlook, And Their Impacts on "Ch-India"

The din of the Chinese and Indian 'Economic Miracle' slowing to a very painful grind is getting louder by the day. I am not one to read a piece in some popular magazine and rush to judgement, and, I do NOT follow CNBC at all - Zip, Zilch, Nil, Zero. Nada time wasted on the "World Markets Entertainment Network". It seems, however, that many smart observers and commentators are talking and paying attention to this slowdown, so I did some digging around of my own.

Europeans (across the EU), it seems can't afford to buy anything. Some folks in Germany and France may be the only exceptions. Perhaps. Being the two largest, and richest of EU economies, both either are, or may be, in a position to 'bail' out the prodigal member nations, and perhaps, to even save the 'Union'. However, French and German rivalries, and troubling politico-historical relationships keep the economic crisis across EU muddling along with a multitude of weekend retreats, conferences, and mundane confidence votes. Even the ECB decided it can 'talk' the world in to believing the incredulous. Notwithstanding Draghi's supposed 'power and influence', his rants are now perhaps more bravado than a genuine reflection of ECB's intent, willingness, and indeed its ability to save the EU. I have a hard time buying his rhetoric. The magnitude of the financial mess is beyond what the ECB, and for that matter, what even a willing Germany and France (together, or on their own) can fix, while being fair to the millions of Europeans who will bear the brunt of the financial yoke that will soon be on them one way or another.

Spain, Portugal, Greece, Italy, et al., are Sovereign nations, and to my knowledge there is no similar precedent or model for a Nation's Bankruptcy. Well, we do have some precedents - Argentina (repeat offender), and in one of more recent history, Russia (1997). But the Russian default then was on its 'Ruble' obligations, and the global players (Banks, Hedge Funds, Sovereign Wealth Funds) were very small players relative to their EU positions today, and Russian Ruble crisis was more of a 'pain-in-the-arse' than being chronic and extremely painful.

Side Note: OK, Long Term Capital Management (LTCM) did turn in to STCM, and eventually in to No-Capital-To-Manage-Management. Wall Street (with the exception of a Bear Stearns), reluctantly 'Stepped-Up', at the behest of the NY FRB, and divvied up the LTCM carcass after pumping in USD 350 million each. Bear Stearns is no more, having being absorbed by JP Morgan, in September 2009, for a ridiculous sum of $2 per share that was later 'revised' to $10, after the ex-Goldman CEO led US Treasury, and, after the US FRB led by lifelong student of the 'Great Depression', Ben Bernanke, refused to allow Bear to access the FRB liquidity window. Nevermind, that shortly after Bear was no more, the FRB opened the same liquidity floodgates to the likes of Goldman and Morgan Stanley, and other broker-dealers. LTCM indeed had very large, and in hindsight, perhaps smart European convergence positions premised on the EU becoming a reality. At over 100 times leverage though, the Russian Ruble blip on the LTCM radar, was large enough to bring severe margin calls rolling in. It was the inability to meet such calls that brought LTCM down. In the end, Wall Street banks that fueled LTCM's leverage and brought LTCM down with aggressive albeit legitimate margin calls, made off extremely well on the remaining LTCM positions they had acquired.

Returning to our storyline, how does one let Spain or Greece file for bankruptcy? Can we afford these countries defaulting on their EURO obligations? I don't think so, for the socio-political consequences would be too dire to even contemplate, not to mention that Wall Street (the global metaphor) would be unable to absorb their own losses stemming from the demise of EU countries. At the same time Wall Street is NOT, this time, in a position to orchestrate a 'rescue' for its own eventual benefit. Trust me, they have been trying hard, but the bankroll of usual suspects - US Treasury, etc., is simply not available. The Obama Administration would not permit that to happen, despite what Ben may be saying in private. QE2? For the presumed purpose of 'stimulating' the US economy? Such shenanigans are laughable at best. In my minds eye, the FRB can add as many numerical suffixes to QE (Quantitative Easing) as they'd like and it would still not make a dent.

That leaves the UK and America as the only potential fiscal/financial saviors. The UK? I was born and raised in India, and the less I say about the British generosity the better it would be for me. Yeah, selfish self interest is at work. Suffice it to say however, that British government never did anything that helped anyone else but themselves, so I'd be surprised if the Brits started writing checks for all those bad consumer bank loans, and banks' losses across the EU.

Yet, the British banks like Barclays, Standard Chartered, and HSBC would love to finance yet another retail credit boom, to fuel demand, for Americans and for the rest of the world, but you see they are rather busy at this moment dealing with the pesky issues of LIBOR Gate (the LIBOR fixing scandal) and that small matter of illegal money transfers to Iranian and Iraqi ventures, in direct violations of US money laundering laws. Clearly, the British banks had the choice to pack up and leave the US, but that would be a lot more expensive in longer term lost revenues. So they accept public humiliation and being slapped with hundreds of millions of USD in fines. Being the world capital of litigation, these and all other banks involved in the LIBOR fiasco will face lawsuits from here to eternity, in the US, not to mention the global settlement of LIBOR Gate, with an army of national regulators that these banks must obtain. It is not a bad time to be defense counsel for these banks.

Lastly, the United States of America herself. Our economy has been sputtering along for over 3 years now. The financial meltdown of 2008-2009 is the gift left behind by 8 years of Bush Administration - 2 wars, one of which entirely illegal and conducted with questionable motives, and by American Innovators (aka Job Creators) in Financial Markets. Yes, America is the smartest, richest, and most powerful country in the World for a reason.

To further dim EU's hopes, America is in the middle of a nasty Presidential Election fight between Mitt Romney (Republican Nominee to be), and the Democratic Party incumbent, President Obama. Let's put it this way - even the Grand Canyon chasm pales in comparison to the the stark policy differences between Mr. Romney and Mr. Obama. We have 71 days to go until Americans pick their next President, and the EU should not expect ANYTHING until then from America. Beyond November 6, 2012, America will either continue to repair, heal, and recover, or she will head off into the Neanderthal socio-political, and the World of Privileged Finance. Which means, friends, that the EU is on its own.

Warehouses, apparently, are rapidly filling (if not already completely filled), across China, to the gills, as demand for all things real, and all things 'fake' evaporates, as Europe and North America shut down their substantial consumption wallets - both retail and institutional spending traps are being severely tightened, if not entirely shut. The domestic momentum of consumerism in both China and in India, and the 'good life' that middle-class folks have become accustomed to, and perhaps may even see as an entitlement, will carry the crowds for some time.

But, unless European and North American economies (consumption) turn around, or the middle class across China and India make some rapid fire lifestyle adjustments, 'Ch-India' is in for a rude awakening.

Good Luck.

PS - I do not follow South America with any serious passion, yet. Japan is simply not capable of any action in this regard. Their exclusion is not inadvertent.

Introduction to an Objectivist Epistemology
Things You Should Know About AYN RAND, and the GOP

Alisa Zinov'yevna Rosenbaum was born in pre-Bolshevik revolution Russia. Her father owned a small, but successful pharmacy in St. Petersburg. When Alisa was 12, the Soviet/Bolshevik revolution (1917) came about, and the Bolsheviks took away her father's pharmacy. The Rosenbaum family fled to Crimea, and Alisa later returned to her (renamed) city of Petrograd where she was among the first group of women allowed to pursue a university education.

Sometime during her university career, Alisa assumed the name AYN RAND as her professional name. Ayn Rand came to America in 1925 on a tourist visa - stayed briefly with family and with family friends in both New York, and Chicago before moving west to Hollywood, CA.

Ayn Rand stayed in the US well past when her tourist visa expired, and worked for a wage as an extra in a few movies. She was an ILLEGAL IMMIGRANT (by modern day right wing rhetoric). Ayn married Frank O'Connor in 1929 and became a US Citizen in 1931.

Over the next 40 odd years, Ayn Rand developed a very significant following in the United States, as a 'thinker' and as a 'free market capitalist' philosopher. The unquestioned commercial success of "Fountainhead" and "Atlas Shrugged" made her a household name, and a very rich lady. Ayn made a lot of money - largely, I believe, by exploiting American fear of Collectivism/Communism, and by relentlessly pushing her agenda to enrich her coffers.

Ayn Rand retired in 1975 (age 70), and applied for SOCIAL SECURITY and MEDICARE benefits despite having a large financial estate. You see, as any other American, she was eligible, and she was ENTITLED. How very individualistic. How very Objectivistic.

Republican Party's drinking from the Ayn Rand fire-hose truly started in 1980s with the so called "Ronald Reagan Revolution", and its cousin, the "Trickle Down" economics that have since been heaved upon the American public. Why do the American masses have to wait for anything to 'trickle down'? America is based on the idea of equality and equal opportunity, so why not GO GET IT? Why wait for the 'Masters' to let crumbs trickle down? Trickle Down is pure and sheer BullShit, for the only things that have trickled down, in the last 30 years, is SHIT. Yes, Americans have creature comforts, flat screen TVs, yada yada yada, etc. But the American masses are broke and bankrupt. That is the true Trickle Down effect.

Trickle Down is the largest socio-economic fraud, in history, perpetrated on the American people by its elected conservative ruling elite. The real objective and true goal of the GOP and post-Nixon Conservatives is to forever keep the masses in modern day equivalent of 'Indentured Servitude'. That was how most passengers on the Mayflower paid for their passage to America. That, despite some lofty verbiage, was the Founders' intent. Read up, and look it up if you do not buy my line.

The likes of the Bush(es), Cheneys, VP candidate Paul Ryan, and the GOP Candidate Mitt Romney, have benefited and taken advantage of the 'American System' and the 'American Way'. And, once they 'made' it, they turned that Ayn Rand fire-hose FULL-ON.

Truth is, in my mind's eye, Ayn Rand propaganda was nothing but the psychology of being utterly and shamelessly SELFISH, to find a way to become rich in America. Once she got there, it was all about more money for her, and she was not above using ANY means to achieve her own goals and objectives, including hurting others' pursuit of similar goals.

The GOP is well on its way to its eventual self-destruction. The American Awakening is finally here.

PS: I refuse to address, or to acknowledge, Libertarians for they are nothing short of Ayn Rand to the power of N, a large positive integer. For my dollar, they can all collectively depart for planet Mars and set up new colonies.

On The Probabilistic and The Correlation Conundrum

We think of most, but not all, variables and experiences, in life as forms of the Standard Normal Probability Density function - the well known Gaussian Bell Curve. Variables can be from the mundane - distribution of height in a sample population, to the esoteric - daily percentage change in asset values (more on this later, but for now we assume a Normal distribution). Experiences, for this purpose, are behaviors relative to expectations of what is considered normal, in any given culture.

Every Normal distribution is defined by two inherent parameters: its 'Mean' and 'Variance'. For practical purposes, Mean is the value of the variable (or, experience) that is the average of all observed data, and Variance represents the degree of dispersion from Mean. As a matter of practice, these distributions are described using the Standard Deviation (square root of the Variance) instead. Standard deviation, represented by the Greek symbol for the letter Sigma, has become synonymous with "Sigma" itself. So when someone says, for example, that something is a 3 Sigma event, they are actually talking about the probabilistic nature of the event:

 A Standard Normal Probability Distribution has a Mean of 0.0, and a Standard Deviation of 1. The distribution is symmetric around its mean - deviations from mean can be positive, or negative. Without going into some boring mathematics, the following list is the probability of an event given how many standard deviations the event is from its mean:

1 Sigma ~ 68.2%
2 Sigma ~ 95%
3 Sigma ~ 99.7%

Now, lets try and put this into context. The probability of an event, that is 3 or More Sigmas away from the Mean, is 0.3%. That is 3 in every 1,000 data points (or observations).

 Folks speak of 3 Sigma events as something that is very rare. When you hear someone talk of a 3 Sigma event, it is that rarity they are talking about. As if, they are surprised, or would be shocked, by the event happening at all!

Continuing with the list:

4 Sigma ~ 0.0063% [1 in 15 million]
5 Sigma ~ 0.0000573% [1 in 1.744 billion]
6 Sigma ~ 0.0000001973% [1 in 506 billion]

5, and 6 Sigma events begin to truly represent the "rare". A Six Sigma event, for example, has a 1 in 506 billion chance of happening. In criminal forensic DNA sciences, for example, the accused typically get convicted if DNA evidence can show 1 in a few billion chance (2 to 4 billion) that the DNA tested did not come from the accused. Identical twins, excluded of course.

 For those with some interest in US stock markets - the S&P500 (SP500) is a benchmark index of the market. It comprises 500 of the largest, and diversified industry stocks, representing 70% of the total US stock market capitalization, or about $10 Trillion. Stock market Index's Mean returns (average % change) and Standard Deviation of Return (Volatility of the Index) can be measured over any time period - 1 year, 3 years, since inception, etc. Looking back at the last 3 years, the Index has a Mean of 16.40% and Volatilty of 16.08%. These are annualized numbers - on average, the index returned (gain) of 16.4%, with a variability (standard deviation or volatility of 16.08%. With the SP500 currently at 1356, investors can expect a 16.40%, or 222 point annualized gain, and a 1 Sigma daily index variability of about 1.005% (16.08% annualized volatility converted into a daily volatility number), or about 13.5 index point a day.


A Six Sigma event, for the SP500 Index (1 in 506 billion chance, remember?) would be a 81 point change, in either direction (up, or down), on any given day.

Looking back upon the days where the SP500 Index experienced the largest changes:
Losing Days, Change in Index points:

 1. on 2008-09-29 Change: -102.65
 2. on 2008-10-15 Change: -86.76
 3. on 2000-04-14 Change: -83.95

Winning Days, Change in Index points:

 1. on 2008-10-28 Change: +91.59
 2. on 2008-10-13 Change: +90.6
 3. on 2000-03-16 Change: +66.32

So, within the last 12 years (approximately 3,072 trading days), we have seen 5 instances of a SIX SIGMA event. 1 in 506 billion is a myth. While mathematically correct, the fallacy lies in market participants assuming that the market returns are normally distributed. They are not, even on normal good days. Factor in EVENT RISK, and all notions of 6 SIGMA being an extremely rare event go out the window.


The second Monster, lurking in most every Investment Banks' trading books, is Correlation risk - both at a trading/model level, and in the tools/models used to estimate Value at Risk (VaR). Correlation estimates the degree to which 2 or more asset prices/returns move in tandem. Banks, particularly large global players, like using correlation matrices across large number of assets classes, to:


1. Create "Basket" trades, and price/hedge such trades - asset return correlation is a significant input into modeling, pricing, and hedging such transactions.  Small changes in correlation, as an input parameter, can create large swings in pricing.  Such correlation based models also guide/predict the amount of hedges across each of the component asset classes, but typically the traders have discretion in how to execute their hedges.  What is quite important here is to note, that correlation input can create large price changes.  So, at inception, a trader may, for example, buy at a few correlation points below fair value thereby creating a large profit (albeit funny money) upfront.  This "funny money" profit is realized over time - either the hedges behave as they are supposed to, and re-balancing the hedges captures the upfront profits over time, or the trader is able to sell the exact same offsetting risk to a 3rd party, at a few correlation points above fair value (the Bid-Offer spread).  Correlation trading, in theory, is a very profitable line of business.


2. Middle Office Risk Management VaR reporting - VaR, no matter how sophisticated the models and tool, is an estimate for projected 3 SIGMA (or, for some banks, 2 SIGMA) losses over a chosen time horizon.  One can calculate 1 day VaR, or 1 Year VaR, and everything in between.  Most VaR models simulate global changes in asset prices using a two step process:


a. Simulate non-Correlated Random Numbers, assuming some probability density distributions.
b. From these non-Correlated random numbers, generate Correlated random numbers - I know, "Correlated Random Numbers" sounds like an oxymoron, but it isn't.  


Cholesky Decomposition is one popular technique used to go from (a) to (b).


Once the VaR models have correlated random numbers - and this may be based on 1000 X 1,000 correlation matrix, or larger, depending on the number of asset classes, and level of granularity desired (1 year vs. 2, 3, 5, 10, etc., on each yield curve, as an example) - calculating VaR is a simple matter of: either repricing every position by applying asset price changes based on the correlated random numbers, or by approximating the P&L for each simulation run by applying time series expansion techniques, given "delta" (first derivative) and "gamma" (second derivative) for each position, and the implied or historical price volatility for each asset class.


VaR estimates are generally used by senior management - to track portfolio risks and exposures (in P&L terms) in an abstract, 30k foot level, and to track positions against policy limits.


The problem with Correlation though is that it is not static.  Even for a moment.  Measuring and updating correlation estimates in real time is not for the faint of heart.  Re-balancing and "Reserves" based pricing, techniques from the world of options pricing theory, is meant to capture correlation changes.  But when Shit Hits The Fan, as it does under any financial, or political crisis, all correlation estimates (historical, or otherwise) go out the window, and correlation trading books are left naked, and at the whim of market gyrations.  Correlation is the most profitable, yet most toxic of products a bank can trade either for itself, or with its customers.  There is no known cure, for when correlation assumptions go astray, other than recognizing and absorbing large losses.


In crisis scenarios, trades in correlation trading books will produce completely unexpected day to day P&L.  And these swings can be large in either direction. This creates a disincentive for the trader to update the marks on their positions when the losses keep rolling in - taking deep daily losses can be catastrophic to bonus expectations and to their trading careers. I am by no means suggesting all traders are dishonest.  There are plenty of honest ones out there.  The problem usually is either a dishonest trader who tries to cover-up losses in their book, hoping the market will turnaround, or an honest trader, who marks their book to market as they should, everyday, but one that is in "love" with their own positions, and can talk management out of being forced to liquidate such positions.  


By the time management realizes the trades are not coming back, it is usually too late.  The damages have been done.  Unwinding such basket correlation trades is no trivial matter.   Market participants will not let a JP Morgan, or any other bank for that matter, out from under these risks without first extracting their own pound of flesh.  That is just Wall Street being Wall Street.  This adds to the pain of unwinding them rotten correlation positions.


For "Senior Management" used to seeing comfortable 4:30PM daily VaR reports, daily P&L, assuming correlation marks are marked to market, no longer makes sense, for it is no longer in line with VaR estimates.  Very few bank CEOs understand why, and the normal reaction is to reach out to the head of the trading unit for answers.  The answers the CEO gets, is of course a function of the culture of the bank, and that of the trading unit.


An insulated CIOs office, thousands of miles and several time zones away from the CEOs desk, one that has enjoyed vast historical success, and that is now sitting on very large correlation risks gone bad - is a perfect recipe for disaster.

We understand why JP Morgan lost $6 BILLION on one single trade, the so called "WHALE" trade.

On Cupertino and i-Devices


The New York Times ran an interesting article today - Apple’s Retail Army, Long on Loyalty but Short on Pay . Here's my take on the Cupertino and its Outlook



No surprises in the NYT article.  I have been to many of them slick stores, and always thought the FruitHeads were probably ripping off Gen X/Y, and more than likely sucking the life out of most of them, all in the name of the "cause".


While the devices themselves are fantastic in design, and perform at or near specs most of the time, the amount of control Cupertino wants, and has, on the ENTIRE iOS + OS X ecosystem is stunning. Recently met a 31 year veteran of service and repair - a small business owner, and a genuinely decent man. The 500 Billion market cap behemoth is 'Nickel and Diming' him on every 20 to 30$ repair ticket. All for the pleasure of receiving broken devices that the folks over at the "Genius" Bar cannot fix. In fact, in my own experience, they have "fixed" and returned devices to me, only to have me turn it 'ON' in the store and discover that the problem wasn't fixed. The GOAL, friends, is to get you out of the store, if you are not buying, ASAP. Despite their fawning over your disappointment, and the carefully orchestrated verbal cues of regret and commiseration, they are actually not interested in fixing you broken device. At least, not in the store. The devices are shipped to a global army of authorized service centers, most of which are independent small business contractors, and Cupertino calls ALL the shots.

Its been long apparent, that Cupertino treats its masses of customers the same way - "if you buy our devices, you will never truly own them, for you can only use them in the manner contemplated by our vision and mission".


Yet, the lack of credible alternatives, until now (though that may be fast chaging), compels millions (including yours truly) to buy. The more Tech savvy amongst us will "Sn0w Blast" their way to freedom from Cupertino's tyranny. Cupertino will often make small changes in OS versioning, in almost a 'Cat-and-Mouse' chase like manner, to defeat the proponents of Open Access - aka Cydia, et al, of the RedSn0w fame. Cydia, by definition, is reactive and has been nipping at the heels of such shenanigans, albeit with appropriate time lags.

 I am one of the biggest proponents of Free Market Capitalism. But, I also believe in fairness and equitable treatment of ALL employees, and especially of Customers. The CEOs $570 million compensation, is egregious, relative to the boots on the ground that are making $30,000 under extreme stress, and with slim to none upward career paths.


Why egregious? Because the CEO works for shareholders, and the gigantic incentive payments, as in $570 million, is effectively moving shareholder money into private, employee wallets. Boards are rarely independent, and if you want to believe they are, I have a bridge to sell to you too.

 Cupertino has also shown an aggressive propensity to litigate everything, and against everyone. When one has the size and scale it does, not to mention the cash hoard, it also has an army of well heeled attorneys filing for injunctions around the world, against the likes of Samsung, Motorola, Google, etc. In fact, lawsuits are being filed, against ANYONE that is a competitor, or a potential competitor.  Reminds me of how much money MSFT spent litigating Anti-Trust charges back in the 90s. Bill Gates lost that one, under the stewardship of Gates Sr., then the General Counsel for the software behemoth. And lest we forget, Cupertino WAS part of the crowd crying "FOUL" against MSFT's IE shenanigans. 


You see, Cupertino loves its monopoly. Anti Trust laws in the US (The Sherman Act) are in place primarily to bust abusive monopolies, and colluding duoplies, etc.  The Justice Department has not looked carefully into Cupertino. Not Yet.

In a way, the i-Device empire is under assault from the relentless march of Samsung, Google, Microsoft, etc., who have the muscle, money, and resolve to not be left behind for too long.  Google paid $14 billion last year, to buy Motorola Mobility - makers of the XOOM tablet, and owner of a veritable portfolio of Patents. A vastly improved Google Tablet (Googlet?) is likely on its way, and its not gonna be 'Nexus' like. Andriod 4.0, aka IceCream Sandwich, is fast closing the gap relative to iOS, perhaps even to iOS 6.0 (to be release during Fall 2012).  Samsung's Galaxy III, meanwhile, is almost an iPhone killer - go check it out, it may change your mind too, and shed some light on why Cupertino was seeking a US injunction against the Galaxy III.  MSFT is no longer content with their foolishly conceived partnership with the Sinking Swedish Ship, and just last week released "Surface", a 10.1 inch tablet running Windows 8 - Ballmer's ultimate revenge, perhaps. 


Imagine the WINTEL manufacturing supply chain complex, with a slick (perhaps even stunning) Surface Tablet, with all your favorite Win Apps - yes, the very ones you love to hate, but have been using since your kids were in diapers. All yours, at less than what the i-Devices cost, and for you to customize and use AS YOU SEE FIT.

 Cupertino is inadvertently destroying the i-Device Food Chain. Tyrannies seldom survive for long in democratic- free-market-rule-of-law economies  What happens when the Super Predator destroys the lowest level Planktons sits somewhere else on this blog.


Innovation and creative talent is everywhere, and thankfully, intangibles cannot be Patented. Not Yet.

 Free Market Capitalism is out for Cupertino's Pie. It is only a matter of time before Cupertino is humbled into submitting to the will of Free Markets.

On Ecosystems, their Food Chains, Predators, and the Financial Crisis

Indulge me, if only for a little while.

Ecosystems are communities of living organisms, and non-living objects that live and serve/function together at a macro level. In a world of rational expectations, members of every ecosystem must function together in organized and predictable patterns, with some degree of mutual (as in two-way) benefits for each member of the ecosystem. This is a both a necessary and sufficient condition in order to sustain and to ensure survival of the ecosystem.

At its core, every ecosystem is in essence a Food Chain - a hierarchy and an ordered sequence of organisms, where every organism, at each level of hierarchy is more powerful than all those below it. For example, ‘Roshambo’, or ‘Rock-Paper-Scissors’ is a type of food chain. It happens to be circular - Paper covers Rock, Scissors cut Paper, and Rock smashes Scissors. Circular food chains do not have a vertical hierarchal power structure. Rather, they are closer to a lateral power structure, where every member of the food chain can destroy the member that is next in order. In other words, there is no ‘Super Creature, or object, in a circular food chain.

Most organic ecosystems, and their central food chains, are strictly linear (vertical), with crisply defined beginning and end points, and a vertically diminishing member’s power structure - the bottom most creature is the least powerful while the top-most Super Creature, in the chain, ‘rules’ over the entire chain.  Whatever sits atop any chain, as the Super Creature, is capable of destroying every organism in the food chain that is below it. Theoretically that is true in an absolute sense. In normal practice, however, Super Creatures, and each organism below the super creature, seldom go after fellow food chain members that are more than 2 levels of vertical separation below. This protocol is seldom explicitly encoded in any rules of engagement of any food chain, but is vital to the long term survival of the ecosystem, and the food chain itself.

For example, our oceans are a very complex ecosystem, with an extremely well defined food chain (top to bottom): Killer Whales are the Super Creatures of the oceanic food chain. They are the ‘Apex Predators’ of the oceans because they have no natural predator capable of killing them. Killer Whales regularly kill even Great White Sharks - once thought to be the Apex Predator. If we think about Killer Whales feeding on Great Whites and keep going down the list, we end up, ultimately, at Planktons. Planktons are the very bottom rung of the oceanic food chain. So long as large quantities of Plankton exist, each creature all the way up to Killer Whales will always have food for survival. Another phenomena supporting long term survival of ecosystems is remarkable difference in how long it takes for organisms at every level to multiply. In general, organisms higher up the food chain take longer to multiply. Long term stability and survival of any food chain, and any given ecosystem relies upon balancing these two forces against needs of the members of the chain. If either of these two balancing forces get forced into a persistent state of imbalance, or are destroyed, then the ecosystem itself may become unstable, and may eventually perish, or self-destruct.

Despite the scenic route taken this far, and perhaps a mundane read for most, this discourse on ecosystems and food chains is directly and immeasurably relevant to Global Financial Systems – the food chain that is the lifeblood of human economic survival. Let’s face it: while humans can survive under extreme living conditions, physical and emotional stress, it is rather impossible for modern humans to survive when the engines of trade, commerce, and money breakdown – without resorting to criminal acts, or acts of violence. Thus, understanding the money chain (one of many food chains in the human ecosystem) is critical to understanding why the US, and perhaps even the Global Economy, is afflicted with such severe malaise today.

There are several complex food chains, in our human ecosystem, that co-exist. The human species is the de facto global ‘Super Predator’ on planet Earth. We control and rule our domain to our own liking, and at will. We have developed defenses and weapons to protect ourselves, and to annihilate those that threaten our existence. And, we keep getting even better at survival. Evolution and freak chance events have brought us immense power and wealth. The planet has never had to reckon with any other species that is capable of so much creativity and creation, and, paradoxically even larger acts of destruction and utter devastation.  Often, extreme acts of humanity and human depravity have both happened at the same time, albeit separated by space and geography. Our love affair with money, and all that it enables, has been around for as long as money has served as the engine of economic activity. Starting with the primitive era when sea shells were used as currency, to our modern day, online-24x7-world money is what moves everything – goods and services, people, communications, etc., around the world. We fly extraordinary distances to meet with people we do not know, because we can trade with them and make some more money.

For the longest time, our banking institutions formed the network of economic and financial pipelines through which we simply moved money. Banks were essentially passive institutions – taking our deposits, and lending the same money out to folks who needed to borrow. Banks made their money by way of the spread they charged between paying depositors (a lower rate) and what they charged borrowers. Everything worked like clockwork unless a forgetful banker lost a pile of depositors’ cash someplace in Bedford Falls. Mr. Banker in any-town-America was a powerful figure – George Baileys were often loved for their compassion and usefulness, while Mr. Potters of the banking world were reviled for their singular devotion to profits. Regardless, community bankers and their customers know each other by first name. There was a certain sense of decency, grace, and respect in bank dealings.

The Great Depression, of the 1930s forced Americans to become highly risk averse. Families, it is said, hoarded their money, or whatever was left of it, in mattresses (among other household belongings). Americans did not trust Banks (Not to mention that there weren’t a lot of viable banks left around the country in that era) because banks were seen as the root cause of the misery of the Great Depression. At the depths of Depression, the US unemployment rate was a whopping 25%, and the stock market had fallen a full 75%.

Progressive minds, in the federal government and in academia, realized (rightly so) that at least 3 things had to happen (many other Acts were enacted, and agencies like the SEC, etc. were established to regulate different sectors of the US financial economy), for the United States to bootstrap itself out of its economic rut:

1. The United States had to back-stop bank deposits by guaranteeing depositors’ money held at banking institutions with the full faith and credit of the United States.

a. This led to the creation of the FDIC (enacted by the Banking Act of 1933) – the Federal Deposit Insurance Corporation. FDIC operates as an agency of the US government, and insures all banking deposits, all 13 Trillion of it, held by US banks. In 1933 the FDIC started with insured deposit limit of $2,500.  In 2007 that limit was $100,000.  Today the limit on insured bank deposits is $250,000, having been raised to 250% amidst the financial meltdown of 2008.

2. Banking and Brokerage activities (or, Capital Market activities) had to be separated. Most of the bank failures, during the great Depression, were attributed to bank runs and banks gambling on stocks with borrowed money, and losing everything, including depositor funds, when the Dow Jones Index collapsed in October 1929 – between Black Monday (October 28) and Black Tuesday (October 29), the Index lost over 25% (30 billion in market value) – this led to passage of the “Glass-Steagall” Act, which was actually a set of 4 provisions in the Banking Act. Commercial and Investment Banks (Brokerage firms) were prohibited from certain cross domain activities.

3. The United States government has to encourage homeownership, and create a mechanism for injecting liquidity into the home loan mortgage markets.

a. Federal Home Loan Act, 1932 – established 12 regional FHLBanks (GSEs) as regulatory supervisor and also the lender for US Savings Banks. FHLB lending was intended to support home mortgage lending activities of the savings banks.

b. Federal National Mortgage Association Act, 1939 – created (FNMA) Fannie Mae – a Government Sponsored Enterprise (GSE) created to provide liquidity for secondary mortgage markets, as in creating a market for buying FHA insured loans from banks originating the loans. Fannie Mae became a stockholder corporation in 1968 but continued to implicitly carry the US government guarantee. In 1970 the federal government authorized Fannie Mae to buy private label mortgages – mortgages not insured by the FHA. At the same time, Freddie Mac was established to ‘create’ competition in the market for secondary loans. In 1981, Fannie Mae issued its first pass-through mortgage trust certificate, or the first Mortgage Backed Security.

American consumers’ propensities changed little until after the end of World War II.  America and its Allies had won the war, and America’s global power, its reach and military might were firmly established. Within America, people could and would no longer live with sacrificing their desire for consumption and consumerism.  US Corporations were happy to fill the needs, and we thus embarked on a 60 plus year journey of economic growth and prosperity that made the United States we have today. Trust me, I am not trying to gloss over huge policy and diplomatic mistakes America made during this time. There were plenty, but somehow, America always recovered and righted itself on its forward path of prosperity and economic dominance.

Up until the end of 1980s, the average American had a mundane financial profile - had a decent paying job, a home mortgage, a car loan, and perhaps a bit of credit card loans. Banks were regulated, and banking – the business of deposit taking – was largely separated from Investment Banking, the business of underwriting and trading stocks, and bonds. But all of that was to change, beginning with the 1990s, when America embarked on a zealous drive towards de-regulation – giving our banks, and corporations more powers and latitude, and ultimately a date with destiny when it all collapsed, and nearly took the entire country with it, in the fall of 2008:

Starting with early 1990s, some banks (like WAMU – Washington Mutual) and Mortgage Loan Originators (such as Countrywide Mortgages) started experimenting with ‘non-traditional’ mortgage loans products, primarily in the State of California. These were ARM mortgage loans – Adjustable Rate Mortgages. Banks were trying to match the risk exposure between their income streams with their cost of funds – floating to floating, and the ARM sounded like a perfect product.  In addition, short term rates were significantly lower than 30 year rates. So an ARM also passed on the benefit of lower rates to home buyers. The catch was that the ARM rate on the loan reset every year, and home owners were exposed to uncertain loan payments. Countrywide solved this problem with its Hybrid-ARM – an ARM with a fixed rate for the first 2 to 10 year term of the loan. Most home owners, given household mobility in America, did not need a 30 year fixed rate, and were likely to move and sell their homes within 5 to 10 years. The Hybrid ARM was perhaps the smartest loan product ever invented. Countrywide also figured that the traditional 20% down-payment required to secure a mortgage loan was absurd, and it was willing to originate billions of loans with less than 20% down payment. With lower initial teaser rates (albeit fixed for 2, 3, or 5 years) and lower down payments, demand for buying property went through the roof. Speculative real estate buying, and investors (not home owners) jumping in became the norm, first in CA, and then spread around the United States. Countrywide Mortgages was more than happy to oblige – further lowering the down payment requirements, eventually down to 0%. Countrywide also introduced the low documentation (income documentation) and the no-documentation loans. To be fair, many mortgage loan originators were essentially doing the same (including loan origination shops owned by Lehman Brothers, Bear Stearns, etc.), but we stick with Countrywide as the poster child. By the late 1990s, Countrywide had perfected the instrument of real estate speculation – the no-doc, zero down, hybrid ARM. Closing Costs? No problem, Countrywide was willing to finance them into the loan too.  Potential home buyers, large swaths of which had never been able to afford homes kept coming in waves, bidding up prices of home, and bringing less than stellar credit history to the closing tables. Countrywide obliged, again, by developing the most toxic mortgage loan in the history of mankind: the zero down, no-doc, Option ARM (Hybrid, or otherwise). In a seductive (perhaps deceptive) marketing move, the ‘Option’ in option ARM was described as one, where the borrower has the option to make scheduled monthly P&I payments, or a reduced monthly P&I payment, or a zero monthly payment.

Imagine this from the home buyers eyes – what can be better than laying 0% out of your pocket as down payment, having your closing costs (between 5 and 9% of purchase price) financed into your loan, and having the option to make NO principle or interest payments on your mortgage loan? Leave your wallets home, come to the closing tables, sign on the dotted lines, and walk away with keys to your very own first, second, or third McMansion.  Pure Bliss!

With property prices consistently rising at between 20 and 30% a year, one could flip their home (sell it to the next sucker) within 6 months (or even less), for a profit. Imagine, making money without investing a dime out of your pocket. Infinite returns! The promise of a quick profit, and greater riches ensnared millions of Americans, as they happily signed off, and took possession of their homes, made zero payments for the first few months, waiting to flip. 

Option ARMs however did not permit indefinite postponement of P&I payments. Loan to Value ratio limit of 125% were typically the trigger at which the Option in Option ARM went out the window and bills came in fast and furious – you see, the zero payments actually meant the unpaid P&I amounts got tacked on to the balance of the loan itself, resulting in ever increasing P&I payments. In addition, because of the zero down, no-doc (also known in the trade as LIAR loans, because borrowers could lie about their real incomes) were at least 5% to 10% higher in rates that prime mortgage made to financially sound borrowers. On the flip side of this sordid sub-prime origination business where every loan broker was effectively screwing every borrower (sub-prime mortgage loans paid 3-5% in fees to the brokers), Wall Street was buying all the inventory of such sub-prime loans, and securitizing them into some of the most screwed up cash-flow waterfalls, aka CDOs - Collateralized Debt Obligations. Rating agencies in the US were complicit in assigning AAA ratings to most such securitizations. Moody's, S&P and others were happy to stamp financial junk with AAA ratings because they collected large upfront fees for their ability to model, analyze and assign unbiased ratings that the investing world relied upon.  Wall Street made millions, perhaps even billions between 2002 and 2006, selling such junk disguised as AAA securities.  


How in the hell a sub-prime pool (junk credit) of individual loans produced a pool of largely AAA rated securities is beyond me. Some called it regulatory capital arbitrage. That was enough reason for this author to call it quits in  the world of financial engineering.  Wall Street had unleashed a beast of the worst kind - it made enormous money, upfront for the banks and investment banks, and it was guaranteed to someday blow-up the entire financial food chain.  But investors around the world couldn’t get enough of the 'high' yielding AAA paper.  As investors bought CDOs (and in the ultimate perversion of yield chasing, the CDO squared) in massive amounts, Wall Street was buying loans, fast and furious, in even greater amounts to keep a solid book of inventory (dry powder) that could be securitized at short notice, and loan brokers were screwing every retail customer in sight as they originated new loan – refinance, equity takeout, whatever, just sign the damn papers!  Mortgage companies, like Countrywide, were buying every loan they could from these loan brokers.  Fannie Mae, and Freddie mac, not wanting to miss out on the piece of action, bought large volumes of sub prime loand from brokers, and from Countrywide, in addition to buying off Wall Street's own securitized sub prime deals.

All of this, in real money terms was the food chain – Wall Street (including Fannie Mae & Freddie Mac) screwing investors (Hedge Funds - probably deserved to be screwed, Mutual Funds and Money Market Funds - dysfunctional fiduciary compass bearing advisors) and loan brokers (greedy shits who didn't care so long as they got their commissions).  Loan Brokers, and lenders such as Countrywide were screwing mom and pop borrowers, by peddling toxic loan products, and by using aggressive sales tactics to get anxious, ill informed buyers to sign on the dotted lines.  This mass orgy of Americans (including institutions) financially screwing Americans was on a pace, and a scale never seen before. 


With the ripping off of America, and its citizens, in full swing, Wall Street - the Super Predator - was effectively creating its own self destruction construct (it just didn't know that it was - Yes, money, particularly large amounts of it can be blinding) by actively setting up destruction scenarios for all human Planktons at the bottom of the US financial food chain, on a grand scale, en masse.  


The entire US financial complex was effectively turned into a house of cards, waiting for someone, anyone, to default on their loan.  Living on the edge of hope and prayers can be catastrophic, regardless of one's beliefs - spiritual or otherwise.

And boy, did those defaults ever come!  It was only a matter of time that either some newer buyers balked at the astronomical asking prices and walked away denying home flippers a neat little profit before the Option ARM lost its Options, or there was a small economic turn and some people lost their jobs and were unable to make their mortgage payments. The resulting shock-waves, from mortgage defaults, with origins in the sub-prime markets were like financial Tsunamis, threatening to engulf and drown the the entire world. They almost did. The rest of the story – US Government bailout of banks, TARP, bankruptcies and seizures of Fannie Mae and Freddie Mac are known to all. Housing and property prices declined in excess of 25% around the world.

What we are seeing in Europe now is denial being exposed in slow, painful layers.  European banks – in Greece, Spain, Italy, Portugal, etc. have been staggering in denial for the past 4 years. So have their national governments.  Fact is that denial is very expensive, and these broke economies just cannot continue to deny anymore. The combined asset size of banks in these countries well exceeds the GDP of each country, and the banks themselves are essentially bankrupt. The amount of capital required to ‘provide life support’, FROB style,  let alone save the banks, is beyond what any of these countries can afford. Europe and Euro Zone is in danger of a total meltdown.  Despite the Grecian election results from this past Sunday, Greece is likely to become a Greek tragedy.

Of course, here at home in the US, things are better, but only marginally so. The government bailed out, and stabilized our largest banks and investments banks (that have since become bank holding companies). The economy remains sick with unemployment over 8%, and dismal GDP growth.  Bank lending remains anaemic.

The US financial food chain is teetering on thin strings. All, because the Super Predator – Wall Street went on a reckless spree fueled by greed alone, in trying once and for all to destroy all the Planktons – We the People, and make as much money as loose or lack of regulations would permit.  


But for the US government's bailout of privately owned banks and other financial institutions (in a definitive display of the rhetoric of free market principles) the US financial food chain would have been extinct 4 years ago.

Did Wall Street learn its lesson? More than likely, NOT. I will bet my last dime, it will happen again. History has a way of repeating itself, particularly when people do not pay it the attention it deserves.