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Groupon Groupthink Gets Bubbly

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One of the marketing tricks that Wall Street likes to pull these days is that they’re “experts”. The ballooning banks, ratings agency scumbags, and hedge fun hyenas front their operations with learned economists, know-it-all analysts and other sundry eggheads who ponce around on radio and TV just to give the world the impression that their company’s greed is backed up by, you know, hard facts.

Of course, it’s all just marketing BS. 99% of them don’t know shit from shinola.

After the debacle that was the ’08 financial meltdown you’d think we’d have got the message that they’re nothing but pump and dump guys in decent suits. But we haven’t.

Now Thereisnoplan doesn’t pretend to be an expert in IPOs and all that jazz but it seems to me that there’s something decidedly fishy about all these fabulous valuations that are flying around for tech companies these days.

Take LinkedIn. Huge valuation in the billions despite being barely in the black after years in business. And then a huge opening, despite an awful lot of talk that it was a prime candidate for short selling. Or how about Groupon, valued higher at it’s IPO than Google was at its maiden moment in 2004 despite having a business model with no barriers to entry, massive marketing costs conveniently kept out of their accounting approach, and declining revenues per subscriber according to some in the know. And of course, waiting in the wings to cash in is the Granddaddy of them all, Facebook, currently valued at $80 billion, against profits of, uhh, who knows, and ballpark revenue of $2 per user per annum.

It certainly feels like there’s a bubble on the horizon. After all, while the middle class is applying for jobs at Walmart, Wall Street and the high-rollers clients feeding at its trough are looking at an 80% bounce off the lows of late 2008. Nobody talks about a dead cat bounce no more, despite an awful economic outlook for the mob out in Main Street America.

The fat cats have a big stash and they want to play again. And what better place to put their fooling-around dough than in those ‘sexy’ Web 2.0 startups led by mega-smart and deeply amoral wunderkinds. Those fat cats love the idea of valuations rising faster than a souffle in a microwave. And they don’t seem to care that the game is stacked.

You see, the funny thing about valuations is they’re essentially meaningless. If someone overpays for a piece of the action, the whole company gets a bump in valuation. It starts with the VC guys. After years in the dumps, and portfolio after portfolio of sucky investments, they need winners, which is why they focus and feed the media on the chosen few. Groupon, Facebook, Twitter and to a lesser extent that happy stalking horse, LinkedIn. They fluff the valuations of the ‘winners’ with timely investments at prices which neatly pump valuations.

Then the banks sniff the cash opportunity, like flies around shit and get in on the act. Goldman Sachs tells its managers to pump Facebook and the others at any price (gussying up their pitches with fancy reports and presentations), then the valuation goes up when big time suckers (worldwide) step up (which is fee number one for the GS boys), and the valuation keeps on rising. Which is even better for GS because that huge valuation feeds a massive IPO which means even more bigger fees for them, when the stock goes stratospheric at the opening bell. A while later, the VC boys get to cash out with a win when their A shares go nutso in the first week or two. And the founders get fabulously wealthy too. It’s a win-win-win.

Who cares if the company has limited profit potential, doesn’t make anything, employ anyone (well, except geeks), or has prohibitive customer acquisition and retention costs?  Who cares if they’re time-wasting drains on productivity, of limited value to marketers, and eminently replaceable with the next big thing? Who cares if most of the dough they earn in the long run comes from crappy ads, data-mining, and brand-diluting coupons?

By the time anyone notices that they’re at best marginal businesses and at worst turkeys, the front money has long gone, the short guys have come in for the post reality check second act, and the rest of us poor schmos are finding out whether we got that gig at Walmart or  not.

Written by coolrebel

June 4, 2011 at 11:14 am

AIG. Was the Bailout From Hell a Mistake?

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The word du jour right now is “rathole”, a rather ugly expletive that equates to plughole, drain, succubus, and other such unpleasantries. It may however be too polite a phrase for what is going on right now with the bailout of AIG, the government’s new pet project that looks like it’s going to hand the downpayment on fixing the nation’s health care shambles to Goldman Sachs and their ilk.

Just like everyone else in this country, I’m spitting with fury at the idea that the government is handing over money to keep these clowns out of the poorhouse. The bonuses should have been blocked way before they went public, and the fact that the President is being exposed to ye olde “What did you know and when did you know it?” game only eight weeks into his administration does not bode well.

Then there’s the irksome question of whether the meeting where it was decided to keep AIG alive in September of last year was actually a little joke played on us by Goldman Sachs. (After all the key people around that table were Paulson, ex-boss of GS, Blankenfein, current boss of GS, and Tim “someone put me out of my misery now” Geithner). We’ve known for years that Goldmans was a class above every other investment bank, but their ability to game the system seems utterly unparalleled now.

Finally, there’s this little nugget. We were told that if we’d let AIG die the global banking system would have collapsed. That the $1.6 trillion in Credit Default Swaps (CDSs) that they sold to the world’s top financial institutions who’d sunk their dough into those toxic assets would suddenly go away, leaving them totally exposed, and toppling like dominoes. Makes sense, right? I mean, if the insurance company backing those toxic assets goes belly up then the world’s banks are left holding the bag. Stands to reason.

Or does it?  With the caveat that I really don’t know what I’m talking about, I’m not so sure. And here’s why.

Let’s start with what everyone knows. We know that the slice and dice mortgage derivatives that the best and the brightest of the world’s financial institutions got suckered into buying because of their AAA ratings (purchased AAA ratings it should be noted) went really, really bad. We know that this stuff has been written down all over the world, but there’s an awfully long way to go.

We know that financial institutions and hedge funds bought AIG’s Credit Default Swaps to the tune of $1.6 trillion (AIG’s own numbers) as a way to insure themselves just in case these investments went bad. We know that AIG didn’t have to back the CDSs with assets like they have to with regular insurance. And if we know that, I’m guessing the guys who are holding these CDSs knew it way before we did. They also knew that there was no way AIG would be able to find more than a fraction of the $1.6 trillion in the “very unlikely” event the assets went bad. In short, as soon as the rats started leaving the sinking ship when Bear Stearns went down everyone knew most of the Credit Default Swaps were worthless.

Wait. Rewind that. “Everyone already knew most of the Credit Default Swaps were worthless.” Far from being the keystone holding the system together, AIG might in fact have been utterly irrelevant to the future of the world’s financial system, except to elite banks like Goldman Sachs. Goldmans, it turns out, were one of the first counterparties out and got paid back in full for their bad bets – by the US taxpayer. Which goes a long way to explaining the scare story that Paulson and Blankenfein (let’s call them the Goldman boys) worked on poor, put-upon Tim Geithner. Paulson signed the check over to AIG, the rathole was dug, and the payouts were readied. Goldman Sachs didn’t want to take the PR hit of taking TARP funds direct, but by instigating “Operation Chump”, ie filtering the TARP funds through AIG first, was a fine and dandy idea. Ka-ching for Blankenfein and Paulson. Ka-ching for the top banks on the planet who didn’t want to face the music. Ka-pow right in the keester for the rest of us.

One could be pardoned for suggesting all this doesn’t pass the smell test. That perhaps AIG could have been left to wither on the vine, and bypassed entirely in favor of the bad bank plan that’s on the cards now, which would have saved us that health care down payment. Or that perhaps the AIG bailout (or “Operation Chump”) might well have been a ruse to salvage the reputation of the top banks.

There are three very painful ironies at the heart of all this. Here’s number one. What made AIG critical to the world economy was the act of saving it.  If AIG had failed, its mainly worthless CDS contracts would have continued to be, well, worthless. But once we made the decision to prop up the company, the world’s banking system knew it had found a sucker to back those contracts again and again. That sucker would be….us.

The second irony is this, If we’d let AIG fail, we would have been forced to price the toxic assets at the heart of the credit crisis, which is the only true way that recovery from the crisis can be quantified. But backing AIG’s CDS’s undermines that vital requirement. Now all we have to do is bilk the US taxpayer for billions upon billions more to honor Credit Default Swaps of banks all over the world at the asking price.

Finally, irony number three. The public is readying a lynch mob. Congress wants blood. Even President Obama is mildly indignant, but it’s all for naught. Because bailing out AIG is the biggest example of moral hazard imaginable. When it comes to punishment, actions speak louder than words. All the feiry rhetoric about AIG execs falling on their swords means nothing if Uncle Sam’s still signing the checks to bail these clowns out. Big banks made really bad bets, then bought snake-oil insurance to back them. Two awful decisions for which they should pay the price. Except that we’re paying it for them.

Someone, please tell me I’m wrong about all this.

The Fix is In – The Long and the Short Of Wall Street

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Another bumper day on the Street. The Government bails out another basket case bank. Everything’s right with the world. Hurrah! Yet again, Wall Street proves it’s an utterly amoral, self-interested, club that has nothing whatsoever to do with you and me.

Massive market volatility, huge gains on the basis of nothing, followed by huge losses and back to gains. Is there a pattern to all this? Not on the surface, at least. The press loves reasons, and tacks on some or other reason for that day’s movements. Recession indicators, new appointment at Treasury, another baby for Angelina and Brad.

But maybe something else is in play too, something mysterious, something very, very fishy.

Traders either go “long” hoping a stock will rise, or they go “short” on borrowed stock hoping the stock will drop and they get to keep the difference on the sale. Long traders and short traders are not in competition, but supposing they were, even in some unspoken way, in collusion. Wall Street traders aren’t known for their mild-mannered approach to business, so could be…

Here’s an example. There are a hundred traders on a floor. Fifty go long, fifty go short. And they work in turns. One day up, another down, Long guys make good on the up day, short guys make good on the long day. The whole floor makes out like gangbusters every day. And the reason? Market volatility.

Economists say volatility is all bad, up or down. They say they don’t understand where the market is going, but in a closed club, where rhythms and patters can be well hidden in the supposed chaos, could any of the volatility be manufactured?

These are the guys who created the ‘toxic junk’, so I for one certainly wouldn’t put it past the boys on the Street to come up with a plan to get their bonuses bouncing again.

Paulson – The Man With The Plan

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Man With Plan

Man With Plan

After nationalizing Fannie and Freddie, then letting Lehman Brothers die for no apparent reason, then bailing out AIG to the tune of $85 billion (now around $150 billion but who’s counting), Hank Paulson sat back to watch the credit markets unfreeze. But instead they just froze up some more.

Hank was totally bummed. “This job totally sucks”.

“The credit freeze just keeps on freezing”, he said to his posse of former Goldman Sachs hacks. “What the frick do I do?”

“You need one big plan”, said Neel Cash and Carry, “not just a whole bunch of little plans stuck together”. Hank nodded furiously. “Yes, yes, that’s right”. After scribbling a few notes on the back of a dry cleaning bill he looked up. “I’ve got it”.

It was so beautiful, so brilliantly simple. Bail out his pals on Wall Street by buying up all the junk they’d created that was sending them all over a cliff. His ex-Goldmans Treasury peeps loved the idea, so Hank canvassed around for a number on this unfathomable pile of shit.

Someone told Hank that all the ‘toxic mortgage securities’ on the books of financial institutions were worth a “don’t quote me on this ballpark” half a trillion, and another guy said they were “maybe, possibly, potentially” worth a cool but toxic trillion, so Hank did what any smart dude would do. He split the difference, thereabouts.

$700 Billion became a household number. The Troubled Asset Relief Program was born. And “Toxic” became the word du jour. Everyone outside Treasury thought TARP stank as an idea, but Hank said that without it we’d all be in the poorhouse. The situation was grim, and he and the President lathered us up into a right panic. It was so important that Hank was going to run it all by himself. But Congress didn’t like that. So after a lot of talk, a bucketload of pork was added and TARP got the go ahead, along with a few trimmings.

Hank sat back and waited for credit to start unfreezing. Except that it didn’t. It froze some more. “There goes my effing bonus,” said Hank, forgetting that he was a public servant.

Meanwhile, Gordon Brown, the British Prime Minister, instigated a plan that everyone really liked. His idea was to invest in the struggling banks so they’d start lending again. Brown demanded the heads of the bank CEOs and the stock he bought in the big UK banks gave the government a real say in how the banks were run. Suddenly, Europe came on board, and things got better on that side of the pond. UK and European banks were starting to look safer. Hank had to do something so US assets wouldn’t fly to London.

Earlier in the crisis, Hank had said no to a meeting with Gordon, probably because he was a “socialist”. But now Brownie’s idea was flying, Hank did what any smart dude would do, and he diverted some of the cash to a watered down version of the Brown plan. He didn’t exactly oversell the idea either, basically bad mouthing it as he enacted it (just the confidence builder we needed). The handout to the bank CEOs happened in a one hour meeting. Hank told the banks to start loaning out the money pronto, but instead they just hoarded it to buy weaker banks. More free money.

Today, Hank decided mortgage securities were out for good. Wall Street took another bath because that meant the spigot was turned off. Hank also decided to use some of the famous $700 billion to bailout consumers with credit card debt, the first time he’d even mentioned the poor bastards with the big screen TVs. Wall Street will rally tomorrow when they realize that bailing out consumers bails out banks who hold their debts.

As for dealing with foreclosures, Hank says that’s way too complicated, so he’s sticking to a new version of the half assed plan that totally failed to get any traction on the most important element of the financial crisis. Someone asked him about saving GM and Ford. “Naaah”, said Hank. “That’s not my deal”.

So what’s left of the original, incredibly vital plan? Just the name. It’s still called TARP, even though we’re not relieving troubled assets anymore.

Maybe it’s not surprising, considering the joke’s on us, but nobody is really talking about this as the farce that it truly is. A five year old could come up with a better plan than Hank Paulson did.

But we have to be grateful to Hank for one thing. If his handling the crisis hadn’t been so pathetic, the election might have been a lot closer. As it is, Hank’s last day at Treasury is January 20th.

Hopefully the world can hold out until then.