Slouching Towards Wall Street… Notes for the Week Ending Friday, 10 June 2011
This is America, where everything is still possible.
Clarence Thomas, Pee-Wee Herman, Bill Clinton, Eliot Spitzer, John Edwards, Chris Lee, Dominique Strauss-Kahn, Mahmoud Abdel Salem Omar… Representative Anthony Weiner joins a band of highly accomplished men — plus an assortment of hapless duds — who have been fingered for naughty behavior. Some have admitted to it, others not, and it is notoriously difficult to prove. It is mildly refreshing that Americans so identify with religion that they find sexual impropriety sufficient grounds to remove politicians from office, and quite a lot for folks put up a resounding “Don’t Like!” on Weinerbook.
Sexual cases are the very definition of “He Said, She Said,” plagued by the task of proving a negative. America’s system of jurisprudence rests upon a presumption of innocence, which we believe speaks not to a rosy view of human nature, but to America’s fundamentalist Free Market religion.
The Free Market is our deity. Its evangelists attribute to it transcendent wisdom and supernal potency, and its acolytes would trustingly place the fate of the world in its almighty hands. The word “religion” is accorded two etymologies, both from the Latin. One means “to read again,” the other, “to bind together.” The first meaning describes a common characteristic of belief systems being based on foundational texts or stories which are told or read over and over again as a fundamental aspect of both individual training, and communal practice. The second meaning — to bind together — reflects the role of religion as social glue, attaching unlike people to one another through a commonality of enunciated values that transcend personal or cultural differences.
Both derivations work well together. People subscribe to a shared system of beliefs and behaviors, the touchstone for which is a text to which all attribute unassailable wisdom. While people disagree over the interpretation of the text, no one argues against its primacy. Indeed, whether orthodox or radically revisionist, adherents insist that their text is superior to any other, not admitting the possibility of valid competing views of reality.
America’s version of free market capitalism has a foundational text — encapsulated in an instantly recognizable formula that silences all debate: the Invisible Hand. As with other religious documents, capitalism’s basic text has not been studied by most of its adherents, but contemporary commentary by its preachers is regurgitated in lieu of debate. As with other faiths, there is a canon of commentary which purports to explain to the masses the true message of the original Prophet. Whether from the Left or Right, no serious participant in the current debate challenges the premise that the Free Market is a form of Ultimate Good. This in itself is frightening. It means that no one will question whether today’s societal suffering is traceable to some fundamental flaw in our system. Millions are out of work, millions have lost their homes, millions wait in vain for government assistance when disasters strike — but when people say the government is to blame, they mean that existing system failed to work the way they imagine it ought to. Anyone demanding a truly new order is marginalized by a consensus that sweeps the entire political and economic spectrum. There is no more Left and Right. There is n Loyal Opposition, just a loyal lapdog of the ruling elite.
The presumption of innocence has been stretched to accommodate some of today’s most questionable behavior — note how difficult it is for the Congress of the United States to get a straight answer out of Wall Street, and that there is no move to recoup the hundreds of millions of dollars paid to the chief executives of criminally mismanaged enterprises (think Fannie and Freddy). There is no accountability in the system and our government is transparently corrupted. Underlying this bizarre state is the meme that says free market participants are entitled to what they get. Folks shake their heads, but executives of failed corporations get to keep their paychecks. As the tough guys used to say in our old neighborhood, “everything I find on you, I keep.”
As to high-profile legal actions, we bet the half-billion dollar settlement paid by Goldman Sachs still left the firm with a healthy profit on the behavior in question. And pardon us if we experience a sense of déjà vu as states attorneys general go after the banks for a foreclosures settlement. The banks will write off whatever is not covered by insurance, the state AGs will hold earnest press conferences and run for re-election, but damn few families will get their homes back. Speaking of new ways to turn a buck, we note the recent action by Bank of America (NY Times, 11 June, “Foreclosing On The Banks”) which foreclosed against a couple who paid 100% cash for their house. “We are very sorry,” said the bank, but refused to pay the couple’s legal fees until they showed up with the local sheriff and started moving the furniture out of the Naples, FL, bank branch. We have stiff laws against paying bribes in countries where corruption is embedded in the economic structure, but not at home. As the states’ attorneys general are aware, there is only a “Foreign” corrupt practices act, not a domestic one.
This is a topic worthy of a lifetime of debate. For the moment, we observe that what columnist Tony Blankley called Representative Weiner’s “digital flashing” is inevitable in today’s America. The pursuit of happiness, once an unalienable right, has metastasized to the exclusion of the protection of common societal rights. Congress refuses to accept responsibility for the trillions in abuse inflicted on America’s taxpayers as they un-legislated all the protections in the financial marketplace. This is outright colonization, no less than the British dispatching their military to force Egypt’s government to make up losses to independent British entrepreneurs. The excessive rewarding of poor performance has skewed our society away from moral behavior and towards Gordon Gekkoism — the words “Greed is Good” have replaced the letters “INRI” on our new Cross of Gold. Our lawmakers’ behavior demonstrates their subservience to the wealthy in industry and finance. Our regulatory agencies are not merely treated with contempt, they are viewed as being un-American because they might attempt to halt certain business activities.
As we observe the birthday of former Senator, Vice Presidential candidate, and adulterer John Edwards (June 10th — 58 years old, and still good looking, ladies!) we observe that power does not make men sexually aggressive, but it does free them of certain inhibitions and can lead to behavior they never before considered. Politicians do what they do, because they think they can. It turns out they are a lot like other people, only moreso.
Representative Weiner’s wife was a top aide to Hillary Clinton during Monica Lewinsky-gate. Now the prospect of a powerful couple rising to the top of American politics has been dashed. Worse, we acknowledge the possibility that she may actually love him and thus be truly suffering. His fellow Democrats’ rage at his lying must be tempered by thoughts of how they will react when their own secrets are broadcast in the Weiner-sphere. To those — including Weiner himself — who say that sexual peccadilloes do not make one unfit for public office, we respond that it is the very definition of poor judgment that it can not be sequestered to the bedroom. (As we go to press there are reports of Weiner taking cheesecake shots of himself in the House of Representatives gym.)
Fit for office? Here’s a guy who can’t figure out how to send a Direct Message on Twitter. Do we want his finger on The Button?
We are unusual and we like it that way.
- Andrew D. Mason, Groupon CEO
Novelist William Gibson coined the word “cyberspace.” Cyberpunk lore has it that a well-known tech company subsequently copyrighted the term, and Gibson retaliated by copyrighting the name of their lead developer. The word “cyberspace” was returned to the public domain, where it belongs, and the developer was restored to sole control of his moniker. In his genre-defining novel Neuromancer Gibson characterizes cyberspace as a “consensual hallucination,” a term so sublime that we wish we had coined it ourselves.
Now it is established society that is beginning to look like the consensual hallucination. As social networks join people together in communities of common interest, the surrounding society increasingly takes on the look of what Kurt Vonnegut called a Granfalloon — a group of people who claim to have a shared identity, but who actually have no common ground for association. Folks meeting up in virtual communities of interest have wrought tremendous changes in what we are now constrained to call the “non-virtual” world, governed by the consensual hallucination of, Syrian political stability or widespread Egyptian support for the Mubarak presidency. Or the validity of Wall Street’s domination of the world economy.
Last year best-selling author Walter Moseley, creator of the Easy Rawlins series of crime novels, launched an on-line project with researchers from MIT, the goal is to identify communities of interest as a tool for targeting political campaigns. Moseley’s on-line questionnaire that asks simply “What are the most important issues?” His example of an outcome is the discovery that a black militant and a white supremacist might both rate quality health care for their children as their #1 priority. Thus are political movements spawned.
Social networking has come into its own as the great transformative aspect of the internet. Now it is transforming the marketplace. Last week (“Too Darn Hot”) we commented that the LinkedIn IPO appeared massively underpriced. Yet, on the heels of that deal Groupon announced its own IPO. Folks who have reviewed its S-1 filing have largely come away dizzy, many commenting that this looks nothing like a company ready for a traditional public offering.
Included in the S-1 is a letter from Groupon founder Andrew Mason who says that, in 30 months of operation, Groupon has grown to 7,000 employees who offer “more than 1,000 daily deals to 82 million subscribers across 43 countries and have sold to date over 70 million Groupons.” Groupon is focused on growing its business, rather than on polishing its financial ratios. Without dwelling on what a Groupon might ultimately be worth to an individual shareholder, we offer some insights from Mason’s letter.
“We invest in growth,” writes Mason, saying the company will pay to acquire new subscribers, because they measure the return per subscriber and count top line revenues and gross profits as their guiding metrics. He says investors should expect Groupon to aggressively pursue opportunities to invest in long-term growth “regardless of certain short-term consequences.” Shades of Amazon. There will be one dominant player in this marketplace, says Mason, and there will be everybody else. You either invest in Groupon, or you will have to choose between everybody else.
Mason explains that the company’s aggressive expansion and management of the flow of customers “opened the Groupon marketplace to more merchants, in turn diminishing a reason for clones to exist.” Translation: we will make it not merely difficult, but meaningless for competition to enter this market. If you don’t think Groupon can do it, you are of course welcome to not participate in their upcoming offering.
The internet itself did not change the world in as radical a way as early proponents believed. We agree with those historians of technology who say the automobile, the elevator and commercial air conditioning wrought far greater changes on society. Faster and easier access to information and communication was a tremendous quantitative change. But the qualitative shift of social change that fulfilled the promise of the internet came with the explosion of social networking and the chain reactions of protest and social revolutions. Now it is truly upon us and is moving from the political sphere to the financial. When social networking comes to Wall Street, you know it’s here to stay.
The San Francisco Chronicle reports (4 June, “Startup’s Fee-Free Deals Go Through Face book”) a new California company, Loyal3, that creates “Customer Stock Ownership Plans” (CSOP) from public companies, where Facebook members can buy “as little as $10 worth of stock in their favorite companies, with no transaction fees and without having to leave the social network.”
The CSOP enables users of products to confirm their loyalty through stock purchases that are now as simple as buying a Kindle download on Amazon. The issuing companies absorb the transaction costs, and stock purchases are priced in dollar amounts, not share quantities, meaning fractional shares can be held. Loyal3 executives say their offering is a sort of “super ‘Like’” for the Facebook crowd and contend that a person who enjoys Coca Cola — and purchases stock through their Facebook account — will now see their consumption choice in terms of economic self interest: every time they drink a Coke, they are paying themselves; every time they drink a competitor’s beverage, they are missing an opportunity to add to their own economic advantage.
Loyal3 says that loyal customer / investors are long-term in orientation — shades of Buy And Hold and Modern Portfolio Theory. It is not lost on us that the Loyal3 director talking up the company’s business model in the Chronicle article is Chris Kelly, who ran for California State attorney general, only to face criticism over his previous role as Facebook’s Chief Privacy Officer.
Facebook redefined “privacy” to mean lack of privacy. Yet, Facebook’s success is evidence that people are more happy about the broad access they enjoy, than they are concerned about who is spying on them. The United States resolutely maintains the fiction that the government does not spy on, or meddle in the private affairs of its citizens. In less obfuscatory regimes, people are tortured for random remarks made in coffee shops. There, the issue of personal privacy is nothing when compared to the ability to connect instantaneously with millions of like-minded citizens.
As Facebook redefined what it means to have a social relationship, Loyal3 wants to redefine what it means to be a shareholder. If you need confirmation that Loyal3 is onto something, look no further than its first corporate customer, which is none other than the Nasdaq stock market. Nasdaq will soon begin selling its own shares on the Nasdaq Facebook page, with Loyal3 acting as the transfer agent. Nasdaq will also promote Loyal3 to its more than 3500 listed companies. A Nasdaq executive notes that only about 18% of Americans own stocks directly and said the goal of Nasdaq’s promotion of Loyal3 is to democratize stock trading.
This is the future of stock ownership, which may be distinct from stock trading. The Dark Pools serve as trading venues for large institutions who don’t want the world seeing their trades until they are completed and printed. New transparent pools make it possible for everyone in the world to chime in on what a company is worth. If you are an Efficient Marketeer, you will like this. Even if not, you should be familiar with studies, known as the Wisdom of Crowds phenomenon, where large groups of people estimate the number of jellybeans in a giant vat, or the number of pedestrians crossing a busy intersection over a period of time. The findings indicate that, the larger the number of people’s guesses factored together, the more accurate the prediction. Current trends point to a complete democratization of pricing and distribution. This will pose a problem for Wall Street, and for the regulators, who are hopelessly behind in any event.
Hedgeye was founded on the vision of a fully transparent and fully-democratized investment process. Our vision of the democratization of the research process has already made its mark in the institutional world, and we are working to our ultimate goal of a fully accessible research process that is transparent, accountable, and reliable to large and small investors alike.
One caveat: Wall Street is not going to like this. And executives still want to get paid. Forgive us for not being all bleary-eyed about the brave new world of LinkedIn and Groupon and Facebook. We think it is compelling for Facebook to employ a self-pricing, self-distributing model when it comes to its own offering, they nonetheless started at the global institutional level, selling shares through Goldman Sachs. Facebook could have sold the same equity to private buyers — even restricting them to no more than a certain dollar investment, in order to truly spread the wealth. Why go first to Goldman? Maybe Facebook wanted to negotiate top dollar for its equity. Maybe Facebook wants to have powerful friends in the global financial community. Maybe Facebook considers itself the Goldman of social networking, and why sell to piker private investors in their ones and twos, when you can hitch your skateboard to the most powerful locomotive on earth? In other words: perhaps not quite so democratized as that!
Bloomberg reports (9 June, “Eyes On Goldman-Libya Dealings”) that US authorities are exploring whether Goldman violated the Foreign Corrupt Practices Act (FCPA) in dealings with Libya. Goldman offered Libya $50 million in settlement against $1.3 billion in investment losses. The deal never went through, but SEC Enforcement lawyers are reportedly perusing documents in the matter. Despite Goldman’s insistence that the money would only be paid if it cleared FCPA requirements, Bloomberg says the mere promise of a future payment, even laden with contingencies, may be sufficient to incur an FCPA action against the firm.
Speaking of inscrutable Western bankers, the NY Times’ Floyd Norris (3 June, “Did SocGen Bet Against Its Own Share Price?”) questions the package shopped to the Libyans by Societe Generale (Financial Times, 2 June, “Libya Bet $1 Bn On SocGen Shares”).
SocGen received a $1 billion investment from Libya in March 2008, two months after its shares collapsed after the Jerome Kerviel rogue trading scandal. Libya did not buy SocGen shares. Instead, the bank structured a contract to would pay Libya any gains on the stock price over the next decade, while Libya would pay the bank in the event of losses. The beauty of swap contracts is that they generally are exempt from reporting as stock positions. Norris wonders whether SocGen hedged its own exposure, and if so — by buying either SocGen shares, or derivative contracts on those shares –why it was not reported by the bank. Our guess: SocGen did a swap with a third party on the other side of its own contract. The documentation presented to the Libyans for the deal specifically said that SocGen was a potential takeover target, because of its depressed share price. The FT piece quotes the pitch book saying “more than ever, M&A rumors have fuelled the news and analysts’ expectations.” This is reportedly the single worst performing item in the Libyan SWF portfolio. Somebody messed up badly with Libya’s sovereign wealth fund. Bad enough to start a civil war?
Folks who think Libya’s Gaddafi is insane should recall it was Gaddafi who conceived and launched the Arab Oil Embargo. And Gaddafi has sound pan-Arabist political credentials — like the leaders of the Algerian resistance against the French, Gaddafi retained his rank of colonel in emulation of his hero, Nasser. Among other threats to Western hegemony, Gaddafi oversaw a multi billion-dollar project that made Libya water self sufficient, and proposed that oil states trade exclusively in gold, bypassing the dollar. His “golden dinar zone” proposal was a threat to Western dominance of world markets. It is curious that, as their first official acts in March of this year, the Benghazi Rebel Council established an alternate Libyan Central Bank, followed by an alternate national oil company. The Council has been recognized by France, the UAE and Germany as the legitimate representative of the Libyan people. Maybe “legitimate representative of the Libyan Reformed Church of the Free Market” would be more accurate.
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