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.

On Fracking - FOR PROFIT, and FOR a Hellish Explotation of America

The maps shows 'Fraccidents' - accidents, often catastrophic, resulting from the practice of Fracking - the extraction of Natural Gas entrapped in deep shale rock pockets, by hydraulically fracturing the rocks. Fracking agents used to fracture such rocks include water mixed with both known and undisclosed chemicals (read Carcinogens, and Radioactive Isotopes).

In addition to the risks of assured water table contamination - fracking fluids ultimately find their way into natural water bodies (regardless of what the Oil & Gas companies say) fracking also releases huge volumes of Methane gas - deadly, and silent - that ultimately spreads out and up, and into unsuspecting communities.  Containing such toxic residuals is very expensive, and fracking site operators are simply looking the other way.  That is morally repugnant, but highly profitable thing to do.  All of the fraccidents on the map are listed at http://bit.ly/KMqLgG

This video, on YouTube, delves a bit into the real lives of those impacted:

As of now, there are NO safe ways to frack (again, regardless of what one may have seen on TV and print ads).  For obvious reasons, the Oil & Gas companies will not spend the monies to develop "safe for humans" technology - costs too much and reduces profit. The moral dysfunction of an Oil and Gas operators, and the Republican (and Democratic) politicians that support fracking, in lieu of campaign contributions, is a staggering shame.

Fracking is not the first time USA Inc. has profited by literally killing Americans, and it won't be the last.

When they are caught violating statures, regulations or citizens' rights, as usual, the fracking operators will either pay a fine, or settle a lawsuit, and continue fracking until all the viable Natural gas is extracted. Life goes on.  Such is life.  But, such fines and penalties pale in comparison to the profits to be extracted. Oil and Gas companies are investing more in political donations to block legislation, and in PR advertising - of the "Fracking is safe" kind.  It is absurd, for that money that can otherwise help develop the technology needed to frack alongside human safety is being spent on spreading falsehood to bend public opinion.

The human, and environmental costs of fracking, and resulting toll on our communites is too much.  If such "Human Safe" technology cannot truly be developed, the United States should ban fracking forever. I have a hard time believing we cannot develop such technology.  That is simply bull.

The costs of unregulated, unsafe fracking are too high. America belongs to its people, and not to Oil & Gas corporate interests, or dysfunctional politicians.

On Europe, EU and the Financial Meltdown of Greece and Spain


The European Union (EU) came together, in 1999, after years of political, economic and ideological negotiations, as a somewhat of a monetary and fiscal governance union - a group of European (11 countries, originally) countries, led by Germany, France, Spain, and Italy, pushed for and got their wishes: 


The EURO: 
The EUR was adopted as the new currency for the entire Euro zone.   Parity rates were fixed for currencies of individual members of the EU club (remember the Italian Liras, Spanish Pesetas, German Marks, and French Franks?) for conversion into the new currency, the EURO.  In a carefully managed transition, the EURO replaced EU local currencies for all commerce (legal tender) across the EU zone on Jan 1, 2002.  It had become the accounting currency of the EU a few years earlier.  10 years later, the EURO is the world's second largest reserve currency (EUR 850 billion), behind the US$.  A 17 member EU zone (5 countries have been added since 1999), with a combined population of 330 million (slightly higher than US population, 2010 census) now use the EURO for all commerce.  In addition, the EURO is also used, around the world, as a "Peg" currency for countries still on a fixed exchange rate regime.  Most of these countries are in Africa.


European Central Bank
A European Central Bank (ECB) was also established in 1999.  The ECB little real monetary powers over the region's individual Central Banks (CB).  It was more of a coordination and governance unit, over each member country's CB.  The ECB's sole mandate was targeting EU zone interest rates, and not the EURO exchange rate.  So the BundesBank (German Central Bank), for example, continued to manage inflation (its sole mandate) in Germany on a day to day basis, but with a goal to remain compliant with EU’s agreed upon economic core measure limits. 


On a practical level, ECB's real purpose, and authority, to control and direct member states' monetary policy indiscretions was questionable right from the start.  The ECB is, in many ways fairly impotent.  But the ECB does have a public, quasi-political bully pulpit for exercises in financial rhetoric.  Oh, it does mint EURO coins, and prints the currency notes, though even that is effectively sub-contracted to member Central Banks.


Rules of Engagement
In addition to the EURO and the ECB, all member states agreed to be bound by a set of fiscal and economic criteria, for admitting new members.  Continued membership also required compliance with such criteria: fiscal deficit no greater that 3% of GDP, Inflation target rates, etc.
The EU zone today: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.  Greece joined in 2001, Slovenia (2004), Cyprus and Malta (2008), Slovakia (2009), and Estonia (2011).  Additions to EU membership are called “Enlargements” (readers are exhorted not to get any wrong ideas!).  10 countries in Europe are yet to join the Enlargement movement, with the UK, Denmark, and Sweden (de facto exemption) being exempt from the “mandatory” enlargement clause.


To be candid, I could not place several of the newer EU member countries, without the help of Google Maps (using an Atlas is so passé).  No shame there, I am fully Americanized.  I also accept the economic benefits rationale for the EU, without any reservations on the underlying economic theories, primarily those of Robert Mundell (Stationary Expectations Model, and International Risk Sharing Model).  Mundell, of course, won the Nobel Prize in Economics (1999) and is a celebrity Canadian economist (them Looneys!).  


The problem, instead is managing member countries’ vast differences in culture, politics, aspirations, laws and regulations.  In theory, the EU zone is about the size of the United States.  But the US has – one single government, Federal Laws, Central Bank (Federal Reserve Board), and despite regional cultural differences, the US is united as a republic.  Realities of how the US actually works are far from ideal.  Congress and the Administration (Executive Branch) somehow manage to differ on every issue – social, economic, etc. – but we Americans manage compromises allowing the country to remain solvent and the government functioning.  For how much longer, I cannot tell.  The key to the US economy functioning (albeit fiscal policies and performance is quite dysfunctional) is the political independence of our Central Bank.  The Fed has a dual mandate of managing inflation (stable prices) and growth (economic output, or GDP).


Across Europe, on the other hand, nationalistic fervor takes precedence over any constraints set by EU rules.  Every member country, since inception, has cheated – to advance its own agenda: prosperity, economic and political clout, etc.  


Furthermore, European financial institutions – Banks – were able to leverage to ridiculously dangerous levels.  Very high leverage (borrowings) creates opportunities for very high returns on Capital.  American Banks were doing essentially the same, in the pre-financial-meltdown era.  Lehman Brothers, for example, had a 37:1 leverage, or assets to equity ratio.  In other words, Lehman borrowed 36 dollars (to lend, or to invest) for every dollar of equity capital Lehman had.  Think about this – every % of profit for Lehman, at 37:1 leverage, is a 37% return on equity.  The converse, unfortunately, is also true – every % of loss is a 37% loss on equity.  So, a mere 3% loss (24 billion) in its balance sheet (800 billion) wiped out 21 billion in total equity (37:1 leverage).  That was the reason for the Lehman bankruptcy filing, the largest ever in US history.  Theoretically, the same is true for countries, but nation states do no file for bankruptcy.  They simply default on their external debt obligations – as in Russia (1997), and Argentina (multiple, repeat offender).


Europe was not immune from the US financial crisis of 2008-2009.  As US banks failed, and US Investment Banks were being sold for pennies on the dollar, banks across Europe received their own margin calls.  Ireland was first to step in, along with the UK, to organize state sponsored bailouts of banks, with equity infusions and outright nationalization (Royal Bank of Scotland).  The US bought preferred shares in a gross amount of 780 billion $, to try to stabilize the US banking system.  In addition, US banking regulators shutdown hundreds of regional and community banks (Washington Mutual’s sale to JPMorgan, Wachovia Bank’s sale to Wells Fargo were impending failures, forced into sale to their suitors).  While a government sponsored rescue and bailout of privately owned banks is a flagrant violation of “Free Market Capitalist Principles”, the markets have never truly been free, so why pretend otherwise, during America’s darkest financial hour?  Too-Big-to-Fail (TBTF) rhetoric was used to justify bailing out Citibank, Goldman Sachs, Morgan Stanley, et. al.  I am not sure anyone of them was truly TBTF.  If ever there was a single institution that was TBTF, we should all be very scared, and the Feds must not allow one to become a TBTF.  Hank Paulson, as Sec. of Treasury, and x-CEO of GS pumped the fear of biblical financial and economic calamity in to Congress; Wall Street obliged by dragging the DOW Jones Index down over 700 points in a day, as Maria Bartiromo, and other cohorts at CNBC (a CNBC only post is coming, someday) projected the end of the world was neigh.  Nice lips for screaming so, BTW.


In the mass hysteria that followed, public opinion was manipulated, overnight, into the corner of sympathy, and of self-preservation.  Congress passed TARP immediately.  And, let me tell you, lest you forget – NOTHING happens in Congress immediately!


But, and again, I digress.  Financial Markets are more connected that ever before.  You may have heard that before.  What that really means, is that almost every bank is taking the same risks, around the world.  European banks bought (or, were sold?) the same securitized mortgage crap that the US banks held on balance sheet in raw loan form, as yet to be securitized inventory.  US banks got caught sleeping at the wheel, not realizing in time, that a tsunami of homeowners were about to default on their loan payments.  Available for sale (AFS) is the accounting category for such loans on bank balance sheets.  AFS account is subject to mark-to-market regime.  Ergo, kaput went Wachovia, Citibank, Merrill Lynch, etc – but not without some shenanigans and machinations, as in not coming clean at the first opportunity.  US regulators clamped down on disclosures (it is a felony crime for CEO, CFO and BOD to not disclose what they know, when they know).  An insurance company, called AIG was also ensnared in this fiasco, and bailed out with a $180 billion infusion from the Feds.  AIG owed a large amount, by way of margin calls, to Goldman Sachs.  Way to go, Hank!  AIG, however, went down because of slightly different reasons – AIG wrote insurance contracts in the defaulted loans and Mortgage Backed Securities born off of such “Liar” Loans.


Easy money, as in lax credit checks, had fueled the US housing boom.  It was not different in Europe.  As European banks began to unravel their countries jumped to the rescue.  Unfortunately, a large number of EU members (the ones I cannot place on a map, with the exception of Greece and Spain, which I can!) are tiny economic powers.  Their banking institutions had become larger than their national GDP! How in the hell is a national government supposed to orchestrate a bailout of such relative proportions is beyond me.  So, Greece, and Spain, and other countries shoved their banking troubles under the rug.  Not unlike Japan’s denial of its own banking crisis, originating again in housing prices in Japan, in the late 1980s.  Many say Japanese people, and its economy experience the lost decades (2, actually).  Even now Japan has not come fully clean.  It’s a cultural thing, I suppose.


In the last few months, Greece has finally accepted and announced that the Greek financial meltdown is here.   And that they are beyond what Greece can manage.  Greece is literally on fire, and unraveling down to its core.  There is some hope of saving the cradle of civilization from civil war, but every day that goes by brings the world close to a Greece that no one would want to contemplate.  And more recently, the Spanish have finally acknowledged they need outside help.  Their banking troubles too are too big for the Spanish government to manage.  Portugal is not far away. I think.  Italy is close, but Italians are Italians.  Eat, Pray, Love was shot partly in Italy for a reason!


So, Germany and France are the only two EU countries with economies and resources large enough to put together a European Bailout package.  The Brits could help.  But the Brits are who they are.  I can see the crusty grin on many a British face, as they read of higher levels of distress across the channel, over morning tea and biscuits.  Not to mention, that the UK is still not out of the doldrums itself.  


As for the US – we could help, but we have a heap of our own problems.  And in this election year, Congress will do what Congress does – NOTHING.


Germany and France will put something together as a concerted rescue effort.  It will likely have unpalatable, perhaps even draconian conditions attached - condition that will be impossible to swallow, for the Greek people, or, for that matter, the proud citizens of any other European country.


The European Union itself is at risk.  In my mind’s eyes, that gig is up.

On Facebook Friends

I know, I am cheating a bit here - hoping a provocative headline will get folks to read what follows.  The story is actually about Facebook and why I think FB will unravel in the next 6-12 months:

Mark Zuckerberg founded Facebook from his Harvard dorm room in 2004.  Everyone is aware of the legend, and most have probably seen the flick "Social Network".

Sean Parker is the iconic, de-facto "Bad Boy" of Silicon Valley.  Yes, they do exist even among Geeks.  Success and sudden acquisition if enormous Wealth is likely the major force in a Geek's social coming out as a "Rock Star".  Not that Sean Parker ain't a Rock Star - at least in the technology world, he is.  At 20, Parker, along with then 19 year old Shawn Fanning founded Napster. Remember Napster? The file sharing network, that took off like a NASA rocket primarily because of people sharing MP3 music files?  No, not Netscape! That was Marc Andreesen's baby, and the first commercial browser based on what we now know as HTML (Hyper Text Markup Language).  Netscape was buried by Microsoft's' muscle flexing, anti-trust violating machinations that led to vigorous law suits and settlements around the world.  But, I digress.  Napster revolutionized how we buy and listed to our music.  A lot of folks got a hold of huge music libraries for FREE.  In fact, Steve Jobs, supposedly copied the Napster idea, along with some enhancements (like Steve Jobs had done all along - XEROX's computer mouse, GUI, etc.) and made it into the mega-billions earner - iTunes.  Without iTunes, Apple would probably be just another struggling computer manufacturer today!  That is an honest assessment, and it is entirely mine.  Anyway, the Recording Industry Association of America, and several bands, led by Metallica sued Napster for violating copyright laws.  Napster eventually shutdown its service because of these lawsuits.  It was a one trick pony.

A couple of years before Napster, Sean Parket had a run-in with the FBI.  Parker had managed to hack into a fortune 500 company's servers, and his IP address (roughly translated - the location of the computer at his Dad's home - Dumb Ass place to hack out of!) brought the Feds knocking on his father's home.  Parker was 16, and served community service time for this felony/misdemeanor.

A couple of years after Napster, in 2002, Parker launched "Plaxo", the first of its kind Contact Address book based in the cloud, that syncs with your MS Outlook contacts.  In 2004, Parker was ousted by the company’s financiers, led by Sequoia Capital, in what was an acrimonious exit that reportedly involved the investors hiring private detectives to follow Parker - a le "High Stakes Divorce style keeping an eye" on your partner!

Story goes like this - Parker saw a website in late 2004, in his girlfriend's dorm room.  That site was TheFacebook.com.  A few months later, jhe met with Mark Zuckerberg.  Zucky hired Parker as Facebook's founding President.  Peter Thiel, Facebook’s first investor once said, that Sean Parker was the first to see potential in Facebook to be "really big," and that "if Mark ever had any second thoughts, Sean was the one who cut that off".

As President, Parker brought on Peter Thiel as Facebook’s first investor. Within the initial round of funding, he lso helped Zuckerberg negotiate to retain control of the company, allowing Facebook the freedom to remain a private company. Parker is credited with championing Facebook’s clean user interface and in developing its photo-sharing feature.  Zuckerberg once said, that "Sean was pivotal in helping Facebook transform from a college project into a real company."

Parker however, was still Parker - during a party in 2005, police entered and searched a vacation home Parker was renting and found cocaine.  Parker was arrested on suspicion of possession but not charged (WTF??). FB's early investors eventually pushed Parker out of Facebook, largely based upon this event.  But, Parker got to walk away with 4% of FB stock.

Yes, that was worth 3.6 billion at the IPO.  Not a bad payday for a Bad Boy's Bad Behavior!  Peter Thiel, meanwhile, walked away with a mere $2.5 billion.  Other FB investors and Friends of Zuck (FOZ) didn't do too shabby either:

Zuckerberg (has to be his own best friend) - $24 billion
Accel Partners - $8.5 bn
Dustin Moskowitz (co-founder and Zuck's roommate at Harvard) - 6.5 bn
Digital Sky Technologies (Russian Investor) - 4.6 bn
Eduardo Saverin (co-founder money man, outsted by Zuck(?), settled for stock) - 3.4 bn.
Note: Saverin is Brazilian by birth, studied in the US, became a US citizen long before IPO, and renounced US citizenship, settling down in Singapore, 6 months before the IPO.  Singapore? WTF!

Sheryl Sandberg (COO since 2008, hired away from Google where she was VP online sales) - 1.8 bn
Microsoft (invested 240 million in 2007) - 1.36 bn
Greylock Partners (invested 27.5 million in FB's series C funding) - 1.275 billion
Meritech Partners, Elelvation Partners (27.5 million in series C) - 1.275 bn
Jim Bryer (of Accel Partners, put 1 million of his own money in) - 510 million
Goldman Sachs (invested 450 million in Jan 2011's 1.5bn capital raise for FB) - 850 million
Chris Hughes (co-founder, left FB in 2007 to work for Obama 2008 campaign) - 850 million
La Kia Shing (the Hong Kong based invested 120 million in FB, in 2007) - 680 million
Mark Kohler (former employee, VP of Product Management) - 680 million
Jeff Rothschild (employee, former co-founder of veritas, data center guru) - 680 million
Adam D'Angelo (Zuck's childhood friend from Phillips Exeter Academy, x-CTO of FB, left in June 2009) - 680 million
Owen Van Natta (employee, joine in 2005 as COO, left in 2008) - 680 million
T. Rowe Price (invested 190 million in April 2011) - 510 million
WTI (investor fund, Parker's contact, invested loaned money to FB initially,  a few hundred thousand) - 425 million

Reid Hoffman (co founder PayPal, invested 40,000) - 375 million
Mark Piincus (co founder of Zygna, 40,000) - 375 million
Interpublic Group (placed client advertising on FB, invested 5 million) - 212 million
Marc Andreesen (angel investor, BOD member) - 225 million
Justin Rosenstein - (x-Google, software guru, x-Fb employee) 170 million
David Choe (painter, served time in Japan, created the murals in the new silicon valley office of FB, took stock as payment) - 170 million
Andreesen Horowitz (investor fund run by Marc Andreesen) - 150 million
Fidelity Investments - 150 million
David Ebersman (employee, CFO, joined in 2009) - 95 million, 400 million after vesting
Mike Schroepfer (employee, VP of Engineering) - 95 million, 370 million after vesting
Theodore Ullyot (employee, General Counsel) - 85 million, 250 million after vesting
Winklevoss Brothers - 37.4 million
Divya Narendra (connectU co-founder with Winklevoss twins) - 18.7 million

The list of insiders/at-one-time-insider is long.  But I think I have made my point.  Zuckerberg and company sold their holdings in VERY LARGE AMOUNTS - 37%+ of IPO shares were offered by insiders - taking home gazillion of dollars.  Zuckerberg and other insider still have large positions in FB, vested or otherwise.  But they are all, unequivocally super rich from the IPO (most richer than Mitt Romney! Sorry, could resist that), having collectively taken home 5.9 billion, in cash (37% of 16 billion raised in IPO).  Cash in the bank is still worth at least 5.9 billion.

Public investors, meanwhile paid $16 billion for shares from the IPO.  As of last night, FB was at $25 and change, a 33% loss from IPO price.  So in the my world of rough arithmetics, FB insiders are sitting on roughly what public investors have lost in 2 weeks of trading!

Here's the reason for this scenic route story - Yesterday, Parker launched a Video sharing service, with great fanfare in New York City, called Airtime Media (of course, Shawn Fanning is also a founding member for Airtime.  See, friends take 'care' of friends).  During the lavish party for Airtime's debut, Parker said:

“Facebook isn’t helping you make new connections, Facebook doesn’t develop new relationships, Facebook is just trying to be the most accurate model of your social graph,” Parker said at the event. “There’s a part of me that feels somewhat bored by all of this. There’s no room for serendipity.”

Sean Parker made a fortune off of his short stint at Facebook.  Notice how his opinion of FB changed between 2004, and yesterday, when he launched a "single feature" social network business model company, that will directly compete with FB for advertising dollars.  It is too early to write epitaphs for FB, regardless of Parker's ultra low present opinion.  He is talking out of self interest.

The Lesson should be obvious.  "There is something about Facebook Friends" (with apologies, to "Mary"!)  Insider selling lockout will end in mid November 2012, when insiders will be free to setup "Estate Planning" systematic sale of their leftover FB stocks.  Most, if not all the 'real talent' at FB will move on.  That is the nature of the beast.  Way too many people have earned (?) their financial freedom.

I doubt FB will survive past the next 24 months.

Good Luck Zuck!

On Corporate Profit Motives in the Social Networking Space

In its seemingly desperate search for those 'elusive' revenue growth opportunities, presumably to justify its 70 billion (albeit, fast eroding) market value, Facebook is now looking into "Allowing Children younger than 13 ways to access Facebook, with parental supervision".  Apparently Zuckerberg & Co. want to make money off of pre-teens and their desire to be 'hip', and 'connected', and their ability to make parents melt to layout cash - so kids can play games, and partake in other Facebook goodies.  Zuckerberg got married recently, and presumably does not have any minor biological children of his own.

I was doing some targeted FB people searches yesterday, and happened to come across a bunch of profiles that were under "full lockdown" - you cannot see anything other than a name, and a profile picture (at times, no picture).  I was looking to confirm if a certain individual, a paroled inmate, convicted for child abuse, and aggravated battery against a child, had a FB page.  Turns out he might.  But everything on his FB page is locked down.  Probably for a good reason.  I could only get close to confirmation.

I have no doubt there are thousands, if not millions, of predators and sex offenders on FB.  There is also an active movement, on behalf of currently incarcerated felons, to allow prison inmates access to FB.  I will reserve opinion on this one, for now.

The internet is, intrinsically, not a safe place because people and personas can easily be manipulated from behind the confines, and privacy, of an offender's apartment or house.  The dangers, particularly for minor children, are real and imminent.

I am not sure what to make of Facebook Inc.'s latest revenue model gyrations.  Sometime back, I recall, an adult woman went out on a first date, with some one she met on match.com.  To make a long story short, the man in that case, as I recall, had a rap sheet of violence and assaults a mile long.  The woman was lucky to get out of the situation, alive, though roughed up.  She sued match.com, and accepted a settlement whereby match.com agreed to background check every match.com user, male or female.  I do not know if match.com is actually doing so, or not.

Facebook may consider background checks - but invasion of privacy, and the sheer cost of vetting 900 million plus users will likely result in a "robo-signing" type operation, if at all, not unlike what we have seen in US foreclosure proceedings - Banking Corporations, much larger than Facebook, failed to apply a reasonable level of care and diligence in enforcing foreclosure proceedings, sometimes even against borrowers who were current on their loan!

I am vehemently against any such moves by FB.  A future 'slap-on-the-wrist', or civil fines of hundreds of millions (which FB can easily afford to pay), does nothing for the individuals, and their families, if some were to become just yet another statistical data point.

Mark Zuckerberg and company have to do that which is right - for society.  After all, Facebook is a Social Network.