Andy Kessler

Technology Review: A Pound of Cure

http://www.technologyreview.com/computing/22852

The federal government is about to spend big on health-care IT. Too bad the medical industry has a vested interest in inefficiency.

Technology is once again being touted as a cure-all, this time for what ails the American health-care industry. The Obama administration's $787 billion stimulus plan includes $19 billion for health-care IT spending that provides incentives for doctors and hospitals to adopt electronic health records. Starting in 2011, stimulus funds will provide additional Medicare and Medicaid reimbursements for health-care providers using such systems.

These federal funding programs assume that the critical hurdle to widespread adoption of electronic medical records is cost. Indeed, hospitals surveyed in a study published last year in the Journal of the American Medical Association reported cost as the major barrier. Yet compared with other businesses, the health-care industry has been unmoved by the logic of lowering costs to increase profits. The truth is that these folks could have digitized the whole industry ages ago. The technology has been around for a long time: Wall Street began phasing out physical stock certificates over 35 years ago. Even the cash-strapped airline industry has gone ticketless, removing huge labor and overhead costs. These industries started using electronic records because they believed it would save money. The health-care industry simply has not followed suit.

The reason lies neither with cost nor with inadequate technology. Rather, the health-care industry's reluctance to digitize its records is rooted in a desire to keep medicine's lucrative business model hidden. Dangling $19 billion in front of a $2.4 trillion industry is not nearly enough to get it to reveal the financial secrets that electronic health records are likely to uncover--and upon which its huge profits depend. In those medical records lie the ugly truth about the business of medicine: sickness is profitable. The greater the number of treatments, procedures, and hospital stays, the larger the profit. There is little incentive for doctors and hospitals to identify or reduce wasteful spending in medicine.

The amount of unnecessary spending is huge. In a project that analyzed 4,000 hospitals, the Dartmouth College Institute for Health Policy and Clinical Practice estimated that eliminating 30 percent of Medicare spending would not change either access to health care or the quality of the care itself. The Congressional Budget Office then suggested that $700 billion of the approximately $2.3 trillion spent on health care in 2008 was wasted on treatments that did not improve health outcomes. This excessive spending has kept the entire health-care industry growing faster than the population, and faster than inflation, for decades.

While electronic medical records do have sizable up-front costs, they also have the potential to save big, in part by streamlining administrative costs. According to a 2003 article by Dr. Steffie Woolhandler in the New England Journal of Medicine, administration accounts for 31 percent of expenses in the U.S. health-care industry, or more than $500 billion per year. (To put that in perspective, Google has spent well under 10 percent of that on all its R&D.) Richard Hillestad of the Rand Corporation wrote in Health Affairs, in 2005, that health-care information technology could save physicians' offices and hospitals more than $500 billion over 15 years thanks to improvements in safety and efficiency.

Electronic medical records would make it much easier to conduct the studies needed to track down this wasteful spending. According to one estimate, only about 4 percent of U.S. hospitals use comprehensive electronic record systems; most rely on paper records. As a result, analyzing the effectiveness of specific treatments--for example, spinal-fusion surgery versus physical therapy for back pain caused by a herniated disc--is unnecessarily expensive and time consuming. Physicians must compile data for a significant number of patients undergoing each treatment and correlate that information with each patient's outcome.

Using electronic health records, in combination with data mining and search technology, would make this kind of analysis much easier. Patients who fit specific criteria could be identified and tracked automatically, for example. Researchers would be able to analyze larger numbers of patients and a wider variety of treatments. With easy access to this kind of information, wasteful spending could be identified more readily, allowing payers, whether Medicare or private insurers, to stop reimbursing for expensive but unnecessary tests and procedures.

An even bigger threat to the sickness industry's business model is that by allowing automated tracking of patients over time, electronic health records would set the stage for early detection and preventive medicine. Currently, the entire industry is organized around treating sickness, rather than keeping people healthy in the first place. Three-quarters of health-care spending is devoted to chronic care, but the National Cancer Institute and the Centers for Disease Control and Prevention allot just 12 percent of their budgets to research on early detection. Moreover, the payment system is structured around reimbursement for treatment rather than prevention.

With widespread use of electronic health records, it would be easier to expand preventive medicine, not only by educating patients about lifestyle changes but also by conducting mass screenings. A recent American Cancer Society study concludes that prevention, early detection, and better treatment decreased cancer death rates between 1990 and 2005 by 19 percent for men and 11 percent for women. I would like to see funding for technologies that could ultimately improve early detection. Studies are now being launched on CT scans that can evaluate a patient's heart in less than one heartbeat. They produce finer resolution than existing technologies and return fewer false positives. These tests cost $1,000 now, but within five years, thanks to expected advances in computing power, we should see a $200 CT scan to detect heart disease before a heart attack.

The ability to detect cancer early enough and cheaply enough for effective treatment would prove much more cost effective than the current approach, which involves spending hundreds of thousands of dollars to extend the life of a cancer patient for a few months--generally, with low quality of life.

As valuable as electronic health records are for streamlining costs, their biggest contribution will lie in moving medicine toward early detection. Let's hope that the adoption of this screening technology is not postponed as long as electronic medical records have been, in a misplaced desire to protect the lucrative status quo. Like all good technology, it's probably going to get off the ground on the grassroots level. Expect your local Walgreens to promote these tests sooner than your doctor does.

Forbes.com - The Inevitability Of Internet Pirates

Pirates are all over the news this year. They were off the coast of Somalia … and now they're in Sweden? In April, a Stockholm court handed down a guilty verdict for "accessory and conspiracy to break copyright law" to the four owners of the Web site Pirate Bay, who now each face up to one year in prison.

Their crime? Setting up a site that allows 22 million users--and that number is growing--to search for and find pointers to (mostly) copyrighted material on the Internet. These so-called torrents are easily downloadable, perfect digital copies of music, TV shows, movies and, as it's known on the Web, pr0n. Outraged at their courts, Swedish citizens got the last laugh when the three-year-old Pirate Party received 7.1% of the vote in the early June European Union elections, guaranteeing it a seat in the European Parliament. Argh.

The funny thing is, Pirate Bay doesn't even host any copyrighted material for download, only directions to find it. If I were Google CEO Eric Schmidt, I'd hold off on that trip to Europe this summer. Because type "The Climb lyrics" into Google and you get pages of links to other Web sites with copyrighted lyrics to this Miley Cyrus song. Type in "Hannah Montana the Movie torrent," and you have a choice of download sites for a copy of the movie, all one click away. That's "accessory and conspiracy," if you ask me.

Fortunately, we in the U.S. rarely pay attention to Swedish laws. Did you know it's illegal in Sweden to repaint a house without a license and the government's permission? But along the lines of Supreme Court Justice Ruth Bader Ginsburg's remark--"Why shouldn't we look to the wisdom of a judge from abroad with at least as much ease as we would read a law review article written by a professor?"--I say bring on the Pirate Party!

Copyright law and its interpretations have been a mess for years. I'm always amused by pay-per-use Xerox machines in libraries bearing a warning label not to copy copyrighted material--as if there was any other reason for the copier to be there. In 1998 Congress was happy to pass an extension to existing regulation, practically written by Disney, that extends artist's copyrights well beyond their deaths. Google has inflamed the anger of book authors, a dangerous group who can type faster than most, by claiming it is allowed to put the complete text of books on its site unless individual authors opt out.

Furious that Internet news sites are using Associated Press content without paying fees, the AP announced tougher enforcement of their copyrights. In an attempt to show how twisted this has become, I (illegally?) copied the following from an AP story I found on Google: "'We can no longer stand by and watch others walk off with our work under misguided legal theories,' said Dean Singleton, the AP's chairman and the chief executive of newspaper publisher MediaNews Group Inc. 'We are mad as hell, and we are not going to take it any more.'"

No matter what laws are passed, copyright infringement is going to happen.

For the most part, Google and others hide behind a simple concept, that they are in the "link serving" business. Ingenious, actually. Others may violate copyrights, their argument goes, but we just serve up links to Web sites that are doing supposedly illegal things, like hosting downloads. Google's implicit claim is that they are not the police of the Internet, which would be quite an expensive task to undertake. And if the Web were strictly regulated, search wouldn't be as lucrative a business. But are they in the same business as Pirate Bay? Will they soon fund the Google Party?

And who are the Web's police? In the end, it's courtrooms in places like Sweden. They're not very efficient; they don't fit the Internet model of scalability. So really, it's no one. Like it or not, the Web is and will remain the Wild West.

Hand out as many guilty verdicts as you like, but folks on the Internet will copy away--because, really, who can stop them? Google won't do it, Internet providers like Comcast and AT&T, who can block a lot of this stuff, can't do it without Network Neutrality proponents squawking, "Interference!"

Even authoritarian regimes fail. (The Great Firewall of China is quite leaky.) Plus, it is so easy to create a Web service to download copyrighted material that, like that arcade game Whac-A-Mole, if you take one culprit down with your mallet another five pop up in the next few nanoseconds. Sad but true, there is not much anyone can do.

If you want to understand how impossible it is to shut this stuff down, here's an example. I've noticed that Pirate Bay's servers go down every once in a while, for as long as a day. A note is put up that they have to travel to reset their servers, which are in an undisclosed location. My bet is Estonia. Or maybe Tuvula.

So make all the legal arguments you want. No matter what court decisions are rendered and no matter what laws are passed, copyright infringement is going to happen. So these folks should stop suing their customers and lobbying for more laws and instead come up with new business models that pirates can't follow them into.

Rock groups Aerosmith and Metallica have had most of their library of songs stolen, so they have incorporated them into the videogame "Guitar Hero." In that format, they sell them again to millions of fans who want to do more than listen. High-definition movies are too big to download (for now), so Blu-ray disc sales continue to grow. The fact that iTunes is tightly linked to iPods legitimized digital music sales. The Amazon Kindle is kick-starting a protectable platform for electronic books. And newspapers and magazines need to create more than just a free display tablet to properly Webify their printed words.

New services--in areas from alerts to social networks to finance to interactive sports-fan participation--need to do things paper versions can't do. These organizations aren't in the railroad/media business anymore; they're in the transportation/communications business. The distinction makes a difference. And in the meantime, expect digital pirates to remain a menace to the old way of doing things.

CNBC: Fast Money - Bull Market or BS?

18:00 minute mark...

WSJ: Was It A Sucker's Rally?

The Dow Jones Industrial Average has bounced an astounding 30% from its March 9 low of 6547. Is this the dawn of a new era? Are we off to the races again?

Only a fool predicts the stock market, so here I go.

I'm not so sure. Only a fool predicts the stock market, so here I go. This sure smells to me like a sucker's rally. That's because there aren't sustainable, fundamental reasons for the market's continued rise. Here are three explanations for the short-term upswing:

1) Armageddon is off the table. It has been clear for some time that the funds available from the federal government's Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.

On Feb. 10, Treasury Secretary Timothy Geithner rolled out another, much hyped bank rescue plan. It was judged incomplete -- and the market sold off 382 points in disgust.

Citigroup stock flirted with $1 on March 9. Nationalizations seemed inevitable as bears had their day.

Still, the Treasury bought time by announcing on the same day as Mr. Geithner's underwhelming rescue plan that it would conduct "stress tests" of 19 large U.S. banks. It also implied, over time, that no bank would fail the test (which was more a negotiation than an audit). And when White House Chief of Staff Rahm Emanuel clearly stated on April 19 that nationalization was "not the goal" of the administration, it became safe to own financial stocks again.

It doesn't matter if financial institution losses are $2 trillion or the pessimists' $3.6 trillion. "No more failures" is policy. While the U.S. government may end up owning maybe a third of the equity of Citi and Bank of America and a few others, none will be nationalized. And even though future bank profits will be held back by constant write downs of "legacy" assets (we don't call them toxic anymore), the bears have backed off and the market rallied -- Citi is now $4.

2) Zero yields. The Federal Reserve, by driving short-term rates to almost zero, has messed up asset allocation formulas. Money always seeks its highest risk-adjusted return. Thus in normal markets if bond yields rise they become more attractive than risky stocks, so money shifts. And vice versa. Well, have you looked at your bank statement lately?

Savings accounts pay a whopping 0.2% interest rate -- 20 basis points. Even seven-day commercial paper money-market funds are paying under 50 basis points. So money has shifted to stocks, some of it automatically, as bond returns are puny compared to potential stock returns. Meanwhile, both mutual funds and hedge funds that missed the market pop are playing catch-up -- rushing to buy stocks.

3) Bernanke's printing press. On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed's moves, this "quantitative easing" gets money into the economy the fastest -- basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.

A rising market means that banks are able to raise much-needed equity from private money funds instead of from the feds. And last Thursday, accompanying this flood of new money, came the reassuring results of the bank stress tests.

The next day Morgan Stanley raised $4 billion by selling stock at $24 in an oversubscribed deal. Wells Fargo also raised $8.6 billion that day by selling stock at $22 a share, up from $8 two months ago. And Bank of America registered 1.25 billion shares to sell this week. Citi is next. It's almost as if someone engineered a stock-market rally to entice private investors to fund the banks rather than taxpayers.

Can you see why I believe this is a sucker's rally?

The stock market still has big hurdles to clear. You can have a jobless recovery, but you can't have a profitless recovery. Consider: Earnings are subpar, Treasury's last auction was a bust because of weak demand, the dollar is suspect, the stimulus is pork, the latest budget projects a $1.84 trillion deficit, the administration is berating investment firms and hedge funds saying "I don't stand with them," California is dead broke, health care may be nationalized, cap and trade will bump electric bills by 30% . . . Shall I go on?

Until these issues are resolved, I don't see the stock market going much higher. I'm not disagreeing with the Fed's policies -- but I won't buy into a rising stock market based on them. I'm bullish when I see productivity driving wealth.

For now, the market appears dependent on a hand cranking out dollars to help fund banks. I'd rather see rising expectations for corporate profits.

Weekly Standard: Putting the Toothpaste Back into the Tube

Federal Reserve chairman Ben Bernanke needs to spell out how he plans to head off hyperinflation.

So how is Fed chairman Ben Bernanke going to get all that toothpaste back into the tube? The Fed has been cranking money out like water over Niagara Falls. The monetary base has increased by a trillion dollars in just the last six months. And he's not done, furiously printing dollars (bank credits, really) and buying Treasuries in an attempt to flood the economy with dollars. When will it end? $3 trillion? $4 trillion? And then what? A functioning economy doesn't need all that cash sloshing around. Is runaway inflation our next crisis?

Let's go back to fundamentals for a second. Money is a placeholder of value--the price of a cold Heineken or the value of work already done, a hole dug, a piece of software written, whatever. When things work just right, prices seek the right level and we get a match between that cold beer and the sweat from working for it.

WSJ: Have We Seen the Last of the Bear Raids?

So is that it? Is the downturn over? After bouncing off of 6500, or more than half its peak value, and with Citigroup briefly breaking $1, the Dow Jones Industrial Average has rallied back more than 1200 points. So, is it safe to go back in the water? Best to figure out what went wrong first -- what I like to call a bear-raid extraordinaire.

The Dow clearly got a boost from Treasury Secretary Tim Geithner's new and improved plan, announced on Monday, to rid our banks of those nasty toxic assets. The idea is to form a "Public-Private Investment Fund" to buy up $500 billion to $1 trillion worth of bad assets -- mostly mortgage backed securities (MBSs) and collateralized debt obligations (CDOs).

While it's true that private interests can conceptually help establish the right market price for these assets, the reality is Mr. Geithner's public-private scheme won't work. Why? Because the pricing paradox remains -- private parties won't overpay, yet banks believe these assets are extremely undervalued by the market. As Edward Yingling, president of the American Bankers Association, said recently on CNBC, "You have to go into the securities, examine the securities, examine the cash flow. I've seen it done, and the market is so far below what they're really worth."

NPR: Zombie Banks

NPR Morning Edition February 17, 2009
Click here to play

Zombie Banks Feed Off Bailout Money by Chris Arnold

• “A zombie bank is not quite dead, but it’s certainly not alive and is not doing any good for the economy.”
• “It’s not lending, but it won’t die so that you can restructure it and have a healthy bank again.”
• “I always liken zombie banks to Night of the Living Dead where you get these creatures walking around with their arms out ripping at the flesh of humans and turning them into the living dead as well."
• “Zombie banks eat the fabric of the economy, they’re just awful. This is what happened to the Japanese, they had banks that were overstuffed with non-performing loans so they had a decade-plus of just an awful economy.”
• “I’ve watched every single one of those zombie movies and you can’t cure zombie-ism, everyone knows that. You gotta shoot them, you gotta get rid of them, cut their heads off, put a silver bullet through their hearts, and get some healthy banks."
• “We have a situation where there’s zombies roaming around and government programs so far are an aspirin, when instead you’ve got to chop its head off to get the economy growing again.”

Of course, that's not quite right:
Spokesman: "The body should be disposed of at once - preferably, by cremation.
Reporter: "Well, how long after death, then, does the body become reactivated?"
Spokesman: "It's only a matter of minutes."
Reporter: "Minutes? Well, that doesn't give people time to make any arrangements."
Spokesman: "Oh, you're right, it doesn't give 'em time to make funeral arrangements. The bodies must be carried to the street, and...and...and burned. Ah, they must be burned immediately! Soak them with gasoline and burn them! The bereaved will have to forgo the dubious comforts that a funeral service will give. Ah, they're just dead flesh - and dangerous!"

WSJ: Why Markets Dissed the Geithner Plan

One of the cool things about being Treasury Secretary is that you get your signature on dollar bills, giving them authority, defending their honor. Timothy Geithner's plan to save the struggling banking system probably does the opposite, throwing good money after bad to a banking system struggling under the weight of its own mistakes. The markets don't like it. The Dow dropped 382 points while bonds rallied as a port in a continuing storm.

Politics will kill a nationalized bank. So spin them out immediately. Send out those shares of each bank to taxpayers. They (will have) paid for the recapitalization

Mr. Geithner announced a three-point plan yesterday to "clean up and strengthen the nation's banks," and made a vague declaration to use "the full resources of the government to help bring down mortgage payments and to help reduce mortgage interest rates." Unfortunately, those are conflicting plans. Hence the markets' skepticism.

The Treasury secretary seems stuck on keeping the banks we have in place. But we don't need zombie banks overstuffed with nonperforming loans -- ask the Japanese.

Forbes.com - Czemu Bernie, czemu?

From the Polish edition of Forbes Magazine, in case you missed it.

 

Forbes.com - Chicago Cubs Economy

The Tribune Company is to announce the buyer of the Chicago Cubs baseball team this week. The short list is Chicago businessman Tom Ricketts, Chicago real estate investor Hersch Klaff and New York private-equity investor Marc Utay, according to a reporter at the Chicago Tribune, who must have, um, pretty good sources. Hope (or is it a goat) springs eternal for Cubs fans, now 100 years since a championship.

The only reason I bring this up is that Mark Cuban, famous hedger of Yahoo! shares after selling his company, owner of the Dallas Mavericks basketball team, frequent finee by NBA commissioner David Stern (another $25,000 last week!) explained a couple of weeks ago on his terrific site blogmaverick.com, why he wasn't a finalist for the Cubs. Inadvertently, or maybe blatantly, he gives the greatest explanation of today's asset values and what has gone wrong with the U.S. economy.

Crazy like a fox, that Cuban. It's just that without financing, the same identical underlying asset is worth much less!

"I never thought it conceivable that it would be hard to spend a billion dollars on a sports team. In this case it was. Add me to the list of people who never want to participate in this type of sales process again. I tried every trick I knew to try to get them to commit to me. ... You name the trial close, I went for it. But I couldn't close them." Like that bigger house down the block you got outbid on.

WSJ: The End of Citi's Financial Supermarket

The great unwind of Citigroup's financial supermarket has begun. In the face of $10 billion in losses in the latest quarter, and with its stock at a 16-year low, Citi struck a deal on Tuesday to effectively sell control of its Smith Barney brokerage unit to Morgan Stanley.

A slimmed down Citi is long overdue. The rationale for a financial supermarket always stuck me as odd. Why would anyone stick all their bank/brokerage/insurance eggs in one basket?

It wasn't the repeal in 1999 of the Depression-era Glass-Steagall Act that killed Citi. It was bad management.

Citibank, founded as City Bank of New York in 1812, has been beat up before. Overextended in mostly bad real-estate loans in the downturn of 1990, losses mounted and the stock got killed, hitting the equivalent of $1 after stock splits. Wall Street was abuzz, debating if the U.S. government had a "too big to fail" doctrine. The bank didn't wait around to find out. It cut its dividend and took a $590 million investment from Saudi Arabia's billionaire Prince Alwaleed bin Talal.

Forbes.com - The Bernard Madoff Morality Tale

From ''Schlub'' to ''Macher'' to ''Goniff.''

Why, Bernie, why?

By all accounts, Bernard Madoff had a successful trading business and was a hitter on Wall Street. Bernard L. Madoff Investment Securities was one of the top three market makers in Nasdaq stocks, had over 600 brokerage clients and claimed to often contribute 10% of New York Stock Exchange trading volume, usually after the 4 p.m. market close.

So why, inquiring minds want to know, did he perpetrate the largest fraud ever on Wall Street, some $50 billion? He had it made, so why risk it?

Most don't set out to be crooks, but Madoff became one when his talents proved lacking.

Well, for starters, if you leave the Tri-State area, very few people know what a market maker is. At the Palm Beach Country Club or the Boca Rio, the preserved specimens at cocktail parties know about cement or paper plants; their brokers at Merrill (or maybe Goldman) are their only ties to Wall Street.

"And what do you do?"

"I'm the third-largest market maker of …"

"Oh, my drink is empty."

WSJ: Ignore the Stock Market (until February)

Down in the morning, up in the afternoon. Or is it the other way around? The topsy-turvy stock market is tough to read.

In the last year, the Dow Jones Industrial Average has briefly been over 13,000 and below 8,000. The past month has felt like the Cyclone roller coaster on Brooklyn's Coney Island -- lots of ups and downs, the whole rickety thing feeling like it's going to crash at any minute.

Great investors are taught to listen to the market. Each tick of the tape has something to say about expectations for growth, inflation, policy changes and looming recessions. The stock market is like a giant mass of pulsing plasma doing price discovery and a game of hot potato, getting stocks into the correct hands with the right risk profile. It's way too big for any one person to manipulate, let alone touch directly. Instead, millions of us provide input with our buying and selling decisions.

When it's at its most efficient, with buyers and sellers neatly matched up at the right price, it's a pretty good predictor. The Crash of 1929 announced a recession, and the wake-up call unheeded might have caused many of the bad policies leading to the Great Depression. The Crash of 1987? Not so much.

NPR: Navigating Wall Street's Lexicon

http://www.npr.org/templates/story/story.php?storyId=96557570
1:02 mark
"The last fund manager or the last set of individuals out in the marketplace, have they given up hope, have they just said, 'you know what, sell everything,' and just en mass, people are  puking out stocks, that would be capitulation, that is what forms a bottom."

Chris Arnold, NPR: "Nice image."

WSJ: What Paulson Is Trying to Do

http://online.wsj.com/article/SB122402984044334627.html
Less than two weeks into it, the $700 billion Troubled Asset Relief Program (TARP) is stuck between a rock and a hard place. Next week, several hundred billion dollars of credit default swap (default insurance) payments on Lehman's debt default are due. No one quite knows who owes what and if they're good for it. Hence the urgency in Henry Paulson and Ben Bernanke's plan to inject $250 billion directly into bank balance sheets, which seems a necessary evil to get capital to the right place and help weaker banks save face. The credit markets agree -- so far.

Wall Street and banks live by short-term loans. But as a loan shark might say, right now, nobody wants to lend to nobody. The rate that banks charge each other, the London Interbank Offered Rate (Libor), has been trading so high above three-month Treasury-bill rates (on Monday it was 4.75% vs. 0.11%) that no one is lending. This so-called TED spread -- the difference between what banks pay and what the Treasury pays to borrow for three months -- signals the health of credit markets and has rarely been over 1% since the 1987 crash. The Treasury is clearly focused on this metric and needs to get it down to historic spreads. First it has to change the current mentality of "who wants to lend to the next Lehman or Wachovia?"

Forbes.com - New Life

Thank you, sir, may I have another? As the stock market gets spanked,down 40% in a year and a day, there is a silver lining. We Americans get our lumps out the way, and start a new life. Much has been made of the "mark to market" rule and its role in the credit crisis, but it probably has saved us from 10-plus years of gloom and doom.

Mark to market just accelerated the inevitable, the write-down of bad loans.

Google the number 157 and the first result that comes up is the Financial Accounting Standards Board (FASB) statement on fair value measurements. It's way too boring to read, but what it says is that if a bank or investment bank has a security that trades at 62 cents on the dollar, you have to carry it on your books at 62 cents on the dollar. Pretty simple. You may think it's worth more--well, of course you do, or else you would have sold it, dummy--but the market says it's only worth 62 cents, so quit arguing.

New York Magazine: Why Wall Street Will Prevail

Why Wall Street Will Prevail
Things are bad now, but the world will never out-finance us.

http://nymag.com/news/intelligencer/51168/

With the stock market tanking and Wall Street’s top firms either vanished or trembling under the skirt of commercial banks, is finance as we know it over? Will the Credit Crisis of 2008 turn New York dominance into submission—to London, Shanghai, Dubai, or even Moscow?

Not a chance. First, globalization has proved itself out. Some schmuck defaults on his 3,000-square-foot exurban dream home, and Fortis Bank in Belgium gets nationalized. It wasn’t just Wall Street buying stupid toxic securities—everyone was. Right now, nearly $200 billion is trying (unsuccessfully) to prop up Russian markets, hundreds of billions of euros are trying to resuscitate European banks. Wanna bet over/under on Chinese financials next year?

Weekly Standard: What is Wall Street these days, anyway?

http://www.weeklystandard.com/Content/Public/Articles/000/000/015/654vucfz.asp

Before the last of Wall Street gets sold off as day-old fish on Fulton Street or washed into the East River altogether it’s worth asking, what is Wall Street these days anyway?

Thanks to Dick Grasso and CNBC, most of us think of Wall Street as balding men in ugly solid-colored suits yelling at each other and throwing litter on the floor of the New York Stock Exchange. Not even close. They might as well be holograms from Disneyland’s Haunted Mansion, just a hangover of years gone by. Or maybe Wall Street is stockbrokers, calling you at dinnertime, trying to put you into a few shares of some hot IPO. Or sleek bankers, guys (mostly) in gray Armani suits, blue shirts with white collars, and Hermès ties, jetting off to London to close some important deal. Not anymore.

Thanks to Dick Grasso, most of us think of Wall Street as balding men in ugly solid-colored suits yelling at each other and throwing litter on the floor of the New York Stock Exchange. Not even close.

So what is it? From 40,000 feet, Wall Street is about access to capital. The stock market trades every weekday, and sometimes slowly, sometimes violently, picks the economy’s winners and losers. Actually, it’s not the market, it’s you and me, our mutual funds and pension plans, the collective “we,” that do the picking via our buying and selling. It’s nice to be needed. You may not even realize it, but magically, the value of companies with great prospects goes up, meaning they can raise capital much more cheaply to hire smart programmers or build another solar panel factory. The flip side is that the price of companies doing all the wrong things (think General Motors and now Lehman Brothers) goes down, starving them of capital, a punishment for screwing up, until they disappear or do something to turn themselves around. The stock market, which is really you and me, does the dirty work of hiring and firing managers and green-lighting or killing projects. Pretty cool.

Radio, Radio: NPR and Rush

Doesn't get much different than these two radio outlets!

NPR Morning Edition September 16, 2008

http://www.npr.org/templates/story/story.php?storyId=94658913

Investors Feel the Pain of Lehman Bros. Collapse by Chris Arnold

At 2:00 mark:

“This happens every cycle and I used to work on Wall Street and I competed against Drexel Burnham and Shearson and Dean Witter and EF Hutton and they’re gone. Each of them made one mistake or another along the way. This is nothing new. I don’t think we’ve entered a new era of the 1930’s and the Depression.”

 

“At the end of the day, no one really misses them. Because someone else steps up and takes over their business. And quite frankly, a lot of the people that work at these firms, the better of them get jobs across the street.”

NPR Morning Edition September 19, 2008

http://www.npr.org/templates/story/story.php?storyId=94795760

Financial Sectors' New Buzzword Is Deleverage by Chris Arnold

At 2:05 mark:

“Wall Street was borrowing at 30 or 35 to 1 so all you needed was a slight little downtick in home prices, which were backing up these sub-prime loans, and you completely wipe firms out.”

Who Do You Trust? Conservatism.
September 25, 2008

http://www.rushlimbaugh.com/home/daily/site_092508/content/01125108.guest.html

RUSH: Now, I went and grabbed a piece today in the Wall Street Journal, and it happens to end up being one of the most persuasive pieces I have read in all of this.  It's by Andy Kessler, a former hedge fund manager, and he's the author of How We Got Here, published in 2005.  Let me join his column in progress: [Quotes from column]

Now, I have some thoughts on this because this piece makes it clear this is not a bailout.  It's a rescue.  Now, these things still have some value.  I don't know what the value is, and they haven't been foreclosed on.  They're pretty close to worthless, but it's not technically a bailout.  And of course you're hearing all these warnings if we do this then there's not going to be any credit.  Okay, now, what does that mean?  ...  Okay, here we go. The piece I just read to you, Andy Kessler, I should give you the headline.  "The Paulson Plan Will Make Money for Taxpayers."  He's a former hedge fund manager, and that's how he analyzes this. He's one of these economists that has commuter models and he's run some projections.  Now, if this guy is right -- and who knows?  See, we don't know who to trust, and we don't know who's going to end up being right.  Our experienced is, "I'm from the government and I'm here to help you," means we're going to get screwed.  And we know there's not one single person involved in this I trust with that prediction. There's not a Ronald Reagan here.  If a Ronald Reagan was saying, "We gotta do this," I would believe it.  There isn't one of those.  So you've gotta scrounge around.  It's actually a great educational process.  
 
Snerdley came in today and said, "I have never worked harder in my life trying to understand this financial thing.  I've been spending more time this past week working on trying to understand this. 'Cause this is all Greek, all this lingo jingo they use, talking about these derivatives and the credit swaps," but it has been an amazing educational exercise.  But if this guy, Mr. Kessler, is right; it underscores points made prior to today by me on this program. Number one: that the federal government is nationalizing the financial markets.  I don't care what anybody says, this is nationalizing the financial markets.  Number two: these loans (he makes it clear in this piece) have not yet defaulted, even if they are risky.  Number three: when the market recovers, the federal government will be able to make lots of money selling the undefaulted loans back to the private sector. Even if they're sold below their original value, it will be more than the government paid to take them off the hands of the financial institutions today.
 
It's made clear by Mr. Kessler in his piece.  Also we can conclude since he's a former hedge fund manager and he likes this, that Wall Street's desperate for this to happen so that these financial institutions that are in need of cash can get it and get it fast, whatever price they have to sell their loans for.  Cash is king right now, they don't have any, and they need it.  They can't borrow. They can't lend. They can't do diddlysquat.  The federal government, as Mr. Kessler makes clear, will have a windfall of potentially trillions of dollars -- which, experience tells me, will be used to expand the size of government.  ...   Does it contain a lot of golden opportunities for people to take some of this stash and enrich themselves personally?  Now, these are the kind of rules there are going to have to built into this.  I'll tell you, as you go through this and you understand it, what becomes clear to me -- and I said at the beginning of this hour, "Who do you trust?"  I trust conservatism.  Conservatism and free market economies work.  It is based on growth.  ... The federal government, as Mr. Kessler, Andy Kessler of the Wall Street Journal today makes clear, the federal government will have a windfall of potentially trillions of dollars if his computer models are accurate -- which they will, I think, use to massively expand the federal government.  I have yet to see a massive pile of money show up that was unexpected that's either given back to us or used to reduce debt.  ...  We have far too many people who are becoming rich from government policy rather than the give-and-take of the free market.  So put simply, based on this article I read in the last hour from Andy Kessler in the Wall Street Journal, the federal government appears to be the only entity capable of coming up with the enormous amount of money it's going to take to take over these loans -- which have not failed yet but which the government itself requires these banks to devalue as assets.  Now, they are required to base their value on current prices.  This is what mark to market is. 

Read entire transcript here.

WSJ: Clean Up Print

http://online.wsj.com/article/SB122230704116773989.html

In 1992, hedge-fund manager George Soros made $1 billion betting against the British pound. In 2007, John Paulson's Credit Opportunities fund correctly bet against subprime mortgages, clearing $15 billion for the year and $3.7 billion for him. Warren Buffett is now hoping to make big money on Goldman Sachs.

What pikers. These are small-time deals. My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury.

 

Here's what's happened so far. New technology like electronic trading meant that Wall Street's bread-and-butter business of investment banking and trading stocks stopped making much money years ago. So investment banks took their enormous capital and at first packaged yield-enhanced, subprime mortgage loans into complex derivatives such as collateralized debt obligations (CDOs). Eventually and stupidly, these institutions owned them for themselves -- lots of them, often at 30-to-1 leverage. The financial products were made "safe" by insurance products known as credit default swaps, a credit derivative from companies such as AIG. When housing turned down, the mortgages and derivatives were worth a lot less and no one would lend Wall Street money anymore.

Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars

Then the piling on started. Hedge funds could short financial stocks and then bid down the prices of CDOs stuck on Wall Street's balance sheets. This was pretty easy to do in an illiquid market. Because of the Federal Accounting Standards Board's mark-to-market 157 rule, Wall Street had to write off the lower value of these securities and raise more capital, diluting shareholders. So the stock prices would drop, which is what the shorts wanted in the first place. It was all legit.

Forbes.com: Lehman = Pan Am

Not to sound harsh, but Lehman Brothers reminds me of Pan Am Airlines. No one (well, beyond their employees) is going to miss them. There are plenty of others to take their place.

In the '70s and '80s, a deregulated airline industry grew beyond its means, was stuck with bad assets, prices dropped and consolidation became inevitable. Pan Am was an early innovator, flying seaplanes into previously unreachable Caribbean Islands. They eventually flew everywhere, competed with everyone, stretched their balance sheet so it was as inedible as the mystery meat they served on flights and then one day went ... Poof!

The true money-makers on Wall Street all find jobs elsewhere. The worker bees in the middle tier see disruption, but are eventually absorbed. The bottom tier goes to work at Foot Locker

Analogies only go so far, but Wall Street got caught in the same wringer. Deregulated since 1975, balance sheets grew and grew as money got thrown at the profitable business of trading stocks and bonds, investment banking and money management. In the cheap-money period of 2002 to 2007, Wall Street’s thirst for capital saw no limits.

Inevitably, too many players and a bit of technology in the form of electronic trading squeezed the profitability of Wall Streets bread-and-butter businesses.

Forbes.com: Google's Offensive Strategy

Back in 1983 on the hit TV show The A-Team, George Peppard's Hannibal said to Mr. T's Bad Attitude Baracus, "There's an old saying: 'The best defense is a good offense.'"

Mr. T replied,"You got that wrong, man. A good offense is the best defense."

Then they wrestled pythons or something.

Make no mistake: This is not about browsers

On Tuesday, Google  let word slip--while showing off a comic book, of all things--about its new browser technology, code-named Chrome.

Was it offense against Microsoft's  Internet Explorer? Defense against Apple's  iPhone browser, Safari? A fight for the great network operating system in the sky? All of the above?

Tech Ticker: Is It Safe?

ABX Indicator

Click on ABX-HE-AAA 06-2 for the chart.

WSJ: The War for the Web

Microsoft was smart to walk away (for now) from its $44 billion bid for Yahoo. It's never good to overpay. But the software giant – whose stock has flatlined for eight years – was onto the right strategy in looking to the Web for growth.

Can't Microsoft build something on its own? Why the rush to pay billions for Yahoo? The simple (and wrong) answer was that adding Yahoo's 20% Web search market share to Microsoft's 10% meant that it could compete against Google's 60% share. Technology changes too fast for that to make sense except on paper. Programs run anywhere these days – on your desktop computer, on servers in data centers, on your iPod, cellphone, GPS, video game console, digital camera and on and on. It's not just about beating Google at search, it's about tying all these devices together in a new end-to-end computing framework.

With the Microsoft/Yahoo deal breakdown, everyone assumes Google walks away with the prize. Not so fast. This contest is just starting. For Microsoft or Google or anyone else to win, they need four key elements of an end-to-end strategy:

- The Cloud. The desktop computer isn't going away. But as bandwidth speeds increase, more and more computing can be done in the network of computers sitting in data centers – aka the "cloud."

There, search results can be calculated, companies' payrolls processed, even the complex graphics for video games can be drawn. But it's not cheap. These clouds are multibillion-dollar investments. Google spent $842 million in the last three months on servers, data centers and fiber optics.

Not only hasn't the Internet yet matured, it's becoming an ever-more high stakes game

Today, there are several major clouds: Google, Yahoo, Microsoft, Amazon and smaller players IBM and Sun. Can there be more? Sure, but it would require a business model that could not only pay for it, but could rip it out every few years and modernize it. Google's $20 billion Web advertising business gives it the cash flow to do so. Advantage Google.

Tech Ticker: The Woz

Part 1 - Get Ready for the Woz!

Part 2 - Creating the Computer of My Dreams

Part 3 - Today's Young Innovators

Part 4 - Favorite Gadgets (yes, he packs a laser)

Part 5 - Stock jock/news junkie

Part 6 - Segway Jousting

NYT: QOTD

Huh?

Tech Ticker: Working Hard and Playing Hard

Carbon Fiber Lifestyle...

NYT: Tough Times for Buyout Lords

I don't normally post these, but I couldn't resist.

http://www.nytimes.com/2008/03/08/business/08mogul.html

Tight Credit, Tough Times for Buyout Lords

By LANDON THOMAS Jr.

Published: March 8, 2008


...
“The crowds are smaller at cocktail parties, the aura is stained, but there still is the letter B, as in billionaire, next to their name,” said Andy Kessler, a former hedge fund executive who has written books about Wall Street. “They may still have halls named after them at universities, but the idea that these guys are the kings of investing, that time has passed.”

UPDATE March 10: A $100 million Donation to the N.Y. Public Library. That was fast. "Stephen A. Schwarzman Building ...the name to be etched on the building." Schwarzman wants his legacy etched in stone and protected by lions.

Tech Ticker: Why Everyone Works So Hard in Silicon Valley

WSJ: Internet Wrecking Ball

Imagine a town that has all sorts of gasoline pipelines running by it but only one gas pump. Rationing is inevitable. So are price controls.

Everyone gets equal amounts, except of course first responders like police and ambulances, which should get all the gas they want. And, well, so should the mayor. And if you can make a good business case that you work 60 miles away, you can file paperwork and perhaps pull some strings for more gas. How about those kids hot-rodding around town who can't drive 55? They get last dibs, and maybe we can sneak in some gas thinner to slow down their engines and not waste gas.

You can do all that and constantly update the gas neutrality rules -- or you can just open another gas station across the street. Or one on each corner.

The trick to an open and innovative Internet is not sneaky technical fixes nor more rules and regulations and bureaucracies to enforce them. The Internet will only expand based on competitive principles, not socialist diktat.

This is the essence of the Ed Markey's (D., Mass.) Orwellian-named Internet Freedom Preservation Act of 2008, which would foist network neutrality on the wild and woolly Internet. The Federal Communications Commission is holding a public hearing today at Harvard Law School in Cambridge, Mass., to build the case for the ill-conceived idea of preventing, as Mr. Markey's bill would, network operators from using technologies that may favor one application over another.

It's a bad idea because the only thing Mr. Markey's bill will preserve is mediocrity via the lack of competition, and full employment for regulators micromanaging a business whose very innovation comes from the lack of rules. With net neutrality, there will be no new competition and no incentives for build outs. Bandwidth speeds will stagnate, and new services will wither from bandwidth starvation.

The idea of network neutrality is that all of our Internet packets are equal, and that the spirit of the Internet and its ability to create wonderful new applications like Google, MySpace and Facebook is predicated on open (albeit limited) access for all. Yet, despite an overabundance of bandwidth pulsing throughout the U.S., we are still stuck with rationing to our homes. Haven't we learned that advancing technology is never served by arbitrary rules to divvy up scarce resources? Look at the dearth of good cell phone applications. Rules make incumbents lazy.

Tech Ticker: The Game Changer

Tech Ticker: Soap Opera

Tech Ticker on Yahoo Finance launched today. Enjoy.

WSJ: What's Next for the Banks

If you want to know what's going to happen to the big banks and investment banks, you've got to go back to early 2003, when the seeds of destruction were planted.

It had been a year or so since a couple of trillion dollars of investor wealth had been wiped out. The Dow was 8000 and dropping, and the stocks of big institutions from Citi to Merrill Lynch to Morgan Stanley were at multiyear lows. Bank lending was down, but no one was really worried. The old "borrow short, lend long and pocket the difference" game had been around for millennia, and banks had weathered worse than this mild economic slowdown.

What was not at all clear was how investment banks were going to make money going forward. Wall Street had piles of capital and no place to go. Stock trading and large parts of bond trading had gone electronic. Decimalization of the stock market wiped out markups. IPOs were down, mergers were down and, gasp, bonuses were way down.

Stocks were out and investors wanted yield -- safe, predictable returns -- but there wasn't much profit in that. Some, especially hedge funds and international investors, insisted on even higher yields than plain old government bonds.

So Wall Street, as it always does, gave investors what they wanted -- excess yield in the form of derivatives, asset-backed, mortgage-backed, collateralized debt obligations (CDOs), basically funky amalgamations of lots of other pieces of paper. Done right, no one but you knew how to value these exotic instruments, so you could mark them up way more than a penny and generate huge fees, profits and bonuses. Win-win.

I Still Hate Dividends, Professor Siegel

Wharton Professor Jeremy Siegel is much revered. His students sing his praise, his books are best sellers, the press adores him. I’ve heard him speak and he is very engaging, even convincing. He is also totally wrong. About dividends. About ETFs based on dividends. Enough to lose you money.

A few years back I wrote an op-ed for the Wall Street Journal Op-Ed page about dividends. Specifically, that I hate dividends. You can read it here. Stocks trade on their prospects for earnings. Dividends are just a bribe to get you interested in slow growing companies who can’t be bothered to reinvest their earnings in something useful. In the past, when companies paid out 100% of their earnings to shareholders, well then dividends mattered. Today, no one pays 100%, so dividends have limited say in the value of a company. In fact, they sucker you in with attractive “yields” right before they consider cutting the dividend. Citigroup anyone?

as persuasive as arguments may sound, the hard evidence proves otherwise.

Sadly, to academics such as Professor Siegel, this is heresy. He was nice enough to write a letter to the editor about my piece saying that I was completely wrong. He is entitled to his opinion, of course, as I am entitled to hold a grudge. He even took a swipe at me in his March 2005 book, The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New, (although he called me Arthur Kessler, nice fact checking, Professor Seagull). And I quote,

“As persuasive as Kessler’s arguments may sound, the hard evidence proves otherwise…Average returns on older firms surpassed the returns on the newer firms…Technology stocks, which pay the lowest dividends have scarcely been market beaters.”

Like, say, Apple. Don’t bother with the book, it is backwards looking twaddle.

TCS: Cali Cupcake Cops

I tried. I really tried. But it took all of a few days with the kids back in school before I ran into the new "policy" that finally pushed me over the edge.

Look, school is hard, starting with no buses. Yeah sure, a good cardio workout in the morning for my massively helmeted and biking boys is just the ticket to put on an attentive face as the day and their teachers drone on. Never mind that their backpacks are heavier than our troops' patrolling the Sunni Triangle. Biking builds character. Or so I've been told. I'm OK with that.

Gosh, I hope that mother with the pig-tails and hairy legs uses hot water.

And I've caved on the whole paper plate and plastic cup thing. Classes are now stocked with real plates and cups (donated, of course) and us eco-squirrels take turns bringing home the dirty dishes, washing them and returning them to the class. Gosh, I hope that mother with the pig-tails and hairy legs uses hot water. Don't you dare try to load the plates in supermarket bags, paper or plastic, for your awkward bike ride home. No, no, no. Go online and find the same unbleached burlap sack I found and you'll get the clucks of approval you are after. Yeah sure, second graders make a real mess and the dishes smell worse than a chemistry experiment gone wrong, but I'm OK with that.

Weekly Standard: YouTube U.

http://www.weeklystandard.com/Content/Public/Articles/000/000/014/250klogu.asp

Without much fanfare, college lectures are being put online, for free. MIT lectures can be downloaded from iTunes University, and you can watch Cal professors pontificate on your computer via YouTube. Is this some new trend? Do colleges feel threatened by Wikipedia? Something funny is going on. No one gives anything away for free without some ulterior motive.

Now you can sleep through lectures in the comfort of your own home

I mean, don't they know college is big business? Right now, 17 million students are involved in higher education, some higher than others. As a business, college is growing faster than sales of multicolored Crocs. Since 1980, the population of students under 25 has grown 40 percent--and for those over 25, it's up even more at 52 percent. Is this what your neighbors are doing during the day? Could be. Even better (for colleges, anyway), since 2002 tuition has jumped 35 percent in real terms (that's adjusted for inflation, for you French-lit majors). And while financial aid is available, there is some $85 billion in student loans outstanding. Who is going to break the news to these kids that they could have bought a Mustang and watched that physics class for free on their laptop between shifts at Dunkin Donuts (which isn't even spelt right)?

Wallstrip Interview

WSJ: Blackstone's World of Cash

Will the private equity party -- this week's Blackstone IPO is icing on the cake -- end with a bang or a whimper? Let's recall that on Friday, Oct. 13, 1989, the almost $7 billion employee-led buyout of United Airlines fell through, a bookend on a wild 1980s of junk bond-led takeovers. The Dow dropped 190 points that day, almost 7%. That's 1000 points today. Ouch. Could it happen again?

Sure. The money involved here ain't small potatoes. Private equity funds raised $221 billion last year, up from $33 billion 10 years ago. There are now over 170 private equity funds with more than $1 billion in assets. The value of deals done last year was $475 billion, up from $37 billion five years ago. Most of it was taking public companies private -- Equity Office, HCA, Harrah's Clear Channel and on and on.

What's fueling the boom? With the Dow over 13,000, it's not like there's lots of cheap companies just begging to be bought and turned around. Rather, the world has been awash in cash. The money supply has been growing like a weed at the same time that the federal deficit is shrinking -- $148.5 billion through the first eight months of budget year, down 34% from last year. As our trade deficit with China grows, they keep buying our long-term bonds. Add to that the Japanese carry trade (borrow in Japan at negligible interest rates and invest elsewhere), and you get distortions -- especially from fixed income investors such as banks, insurance companies, pension funds and hedge funds, all chasing higher yields.

WSJ: A Future For Newspapers

New technology is mucking up the media, and newspapers seem to be taking the brunt of it. Craigslist and eBay took away classified ad sales, direct advertisers are allocating budgets to search engines and circulation is receding faster than Bruce Willis's hairline. Investors seem to prefer the safety of television broadcasters and cable companies, with their nice, government-mandated franchises and pipes that reach directly into homes.

Media, after all, is about owning a pipe -- some conduit between the creation of news or entertainment and the eyeballs that consume it. Media companies sell the owners of those eyeballs lots of things we weren't even sure we needed. The higher the ad rates, the better the business. The pipe reaches the consumer directly, keeping competition at bay. The tighter the pipe, the less the competition.

For broadcasters, the pipe is spectrum given or bought from the Federal Communications Commission under the guise that spectrum is scarce. For cable operators, it is often the sole cable franchise in a town. For phone companies, it's those regulated copper wires, some of which are so old they have Alexander Graham Bell's teeth marks in the insulation.

And newspapers? Where's the pipe? What conduit to readers do they control? Well, there is the guy that drives up and somehow misses your driveway every morning. Or the sidewalk newspaper dispenser where the homeless man buys one copy and steals the rest so he can peddle them on street corners. So unless you are the only paper in town (ask Warren Buffett how much he makes on monopoly papers like the Buffalo News), there is not much of a pipe to control. Instead, reputation, quality news gathering, trust and credibility maintain the franchise, something The Wall Street Journal and the New York Times enjoy on a national level and the Washington Post and others have locally.

NYT: Trust Me

Is there trust anymore? We are caught between Obi-Wan Kenobi saying, “Let go, Luke. Luke, trust me,” and Eric “Otter” Stratton in Animal House declaring, “You [Delta House language] up. You trusted us!” Heck, the civilized world still shakes hands to show we aren’t packing daggers. In business, “trust me” often turned out to be the two most dangerous words in America.

Joe Nacchio is the latest trust-destroying manager, convicted on 19 counts of insider trading and dumping Qwest stock while smiling to shareholders. Names like Ebbers, Kozlowski, Skilling, and Martha are now synonymous with fraud, scandal and even in polite conversations are likened to the thin film that covers standing ponds. (I did meet Martha once, and she gave me a recipe for flourless waffles, so let’s give her a pass, shall we?)

Wall Street research was long ago disgraced, but add to that mutual fund late trading, options backdating, onerous interest ratings and insurance premium overinflating, and what you have is a lot of folks whose reputations have been shredded into scraps finer than Arthur Andersen documents. And the government? Given all the lying in D.C. on both sides of the aisle, you would think Scooter Libby’s defense would have been selective enforcement.

So here I am at my Carrie Bradshaw moment: Will we ever trust anyone again?

NYT: Blank Slate Hedgies

As heard on TV one morning while shaving:

Morning Show Talking Head: So tell us what drives hedge fund managers?
Hedge Fund Dude: It’s just never ending. Thinking about what is going to work next. I have a friend who is worth $150 million who is working some new ideas for a fund.
Talking Head: If I had $150 million, the last thing I would do is start a hedge fund.
Hedge Fund Dude: That’s why you don’t have $150 million.

What exactly is a hedge fund? It’s nothing more than an investment vehicle that can buy and sell almost anything. Unlike mutual funds that just charge 1 to 2 percent of assets as a fee no matter how they do, hedge funds get to keep 20 percent (and often more) of their investment gains. It’s an incentive for their managers to lead bizarre lives and suffer from mental anguish. You think they should go crazy for free?

According to Hedge Fund Research, $1.568 trillion dollars is now managed by hedge funds. This isn’t small potatoes. Who are these masked men and women? And how is it they make so much money, some of them hundreds of millions of dollars a year, for themselves?

While capital sloshes around the globe seeking its highest returns, most money is slow, almost sedentary, kind of meandering around like a humpback whale looking for easy pickings. Hedge funds, on the other hand, are playing a game of Whac-a-Mole. Whenever anything with a potential return pops up its head, young cobras staring at multicolored screens blast the mole into submission, quickly buying underpriced shares or dumping overpriced ones. How do they know what is over- or underpriced? That’s their dirty little secret. There is no one answer.

NYT: A Colossus Mistake

In H Block at Bletchley Park, the historic code-breaking facility 50 miles from London, visitors can view a rebuilt working model of a Colossus, one of the first electronic digital computers, built during World War II to decrypt Nazi codes. If only they hadn’t waited 60 years to put it back together — there might still be a British Empire. And Silicon Valley might be in some bog outside of Bletchley Park.

During World War II, there were two major Allied efforts — one British and one American — to build electronic computers. The United States needed artillery-firing tables for their big-gun battleships. Until then, the word “computers” referred to people, mostly young women, who slowly fed error-filled information into number crunching machines. One such operation, at the Aberdeen Proving Ground in Maryland, was used to solve differential equations involving speed, wind, distance, etc., to improve accuracy. Over at the University of Pennsylvania, John Mauchly and J. Presper Eckert, with help from the U.S. Army, were working on the design of the ENIAC, an electronic and programmable computer, to help automate and speed that task, and fire those human computers. The contract to build it was signed in 1943, but it was still being developed as the war dragged on. In the meantime, most artillery shells fired during the war simply missed.

The British had more pressing needs. They knew the Nazis were sending messages to troops and to U-boat submarines in code, using a code generating machine called Enigma. The Enigma had actually been used by Germany and other European countries since the 1920s. The Poles developed a model that successfully cracked the Enigma code in 1932. But by 1939, the Nazi’s had learned to change the critical key every day instead of every month. As Poland fell, the Poles smuggled their model, known as the Bomba, to the British, who set up a top-secret effort, ULTRA, at Hut 8 in Bletchley Park to decrypt the Enigma messages. Even with the help of the Polish Bomba it would take several days by hand to determine each day’s key.

Alan Turing, who conceptualized programmable computers at Princeton, was brought to Bletchley Park to design a machine called the Bombe out of electromechanical relays to automate this decryption task. Bombe was delivered in March of 1940 and by December of 1944, there were 192 Bombe machines, more calculator than computer, decrypting code. The Germans, by the way, also had a computer effort, led by Konrad Zuse, which was eventually destroyed by Allied bombing.

Hitler and his high command then developed a tougher code to communicate, named Lorenz (the Brits called it Tunny). An extra letter in its key made it much tougher to crack — it could take weeks to decipher the key instead of a day. In March of 1943, the brains at Hut 8 developed a programmable machine out of vacuum tubes to speed up breaking the Lorenz code. It was named Heath Robinson, after the British Rube Goldberg, as it was more of a contraption than a computer and didn’t help much.

Tommy Flowers and later Alan Coombs of, get this, the British Post Office, improved on the Robinson and by December of 1943, their aptly named room-sized Colossus computer was breaking the Lorenz code (or other codes as it was reprogrammable) in hours instead of weeks. The Colossus was the first real programmable computer; with 1500 vacuum tubes, it could read messages at 5000 characters per second and do 100 calculations at a time, all searching for patterns.

The Colossus played a crucial role in D-Day. By understanding where the Germans had the bulk of their troops, the Allies could decide which beaches to storm and what misinformation to spread to keep the landings a surprise.

The ENIAC, on the other hand, was no help in the shelling of German positions on D-Day. How do I know this? It wasn’t done yet. It wouldn’t be operational until February of 1946, fully two years after the British Colossus, and well after the war was over.

So why, one has to ask, is the computer industry so uniquely American? Why is the U.S. a superpower and the British lapdogs instead of bulldogs? At least in part, blame the Russians. Or British paranoia.

After VE day, the Cold War started immediately. The British were scared to death of Russian spies stealing the plans for the Colossus, of which 10 had been built. So they got rid of them. Yup, destroyed them — took an axe to the machines and lit a match to the plans. All the Bombes were destroyed, too. Can you believe it? Apparently, British Intelligence kept two Colossus machines for their own use (training Secret Agents 001 through 006, perhaps?). But these final two were destroyed the 1960s. It didn’t matter. Secrecy or paranoia, the general public didn’t learn about the Colossus machines until the 1970s. Now you know why there is no Sir Bill Gatesford, Duke of Bits.

Meanwhile, back in the U.S., the ENIAC was finally done and the War Department didn’t burn it. Instead, on February 16, 1946, it put out a press release and then held the first computer conference to explain how the ENIAC worked. Talk about open source! Every major corporation and university sent representatives, each of whom came back home and declared, “I gotta build me one of them things!”

And there you have it. The computer was born at Bletchley Park but the computer industry was born in the good old U.S. of A. Innovation ran rampant. In rapidly changing businesses, secrecy is not always the best policy. Silicon Valley popped up to supply cheap transistors for this uniquely domestic industry. Software grew. Today, companies make billions doing the same searches the Colossus “search engine” pioneered. The military even got their payback, eventually computer-guiding bombs via global positioning satellite coordinates instead of artillery firing tables. A trillion dollar press release!

Poor England. Technology today is a multi-trillion business dominated by American companies, thanks to simple British paranoia. Their century-long lead as an industrial power evaporated with nothing to replace it. A truly Colossus mistake! Let’s hope paranoia is not constraining the United States in the next wave of technology or potential wealth creation: offshoring, F.D.A. approvals, nuclear energy, stem cell research, bandwidth auctions, Area 51?

http://kessler.blogs.nytimes.com/2007/04/19/a-colossus-mistake/

NYT: Share the Air - A Capital Idea

Our friends at the Prague Stock Exchange would agree that common ownership of property has been proven to limit innovation. So should our airwaves be publicly owned or privately controlled? Bet I surprise you with my view!

In less than two years, on February 17, 2009, that 27-inch Sony Trinitron with the rabbit ears antenna on top that your parents bought you for graduation will go dark. Well, sort of. That’s when a government mandated transition to digital television signals will be complete. That old analog broadcast signal blasting from the top of the Empire State Building and elsewhere is going the way of the typewriter. Sure, grandma is going to have to pony up for cable or a special digital adapter to watch “Fear Factor,” but wow, progress from a government bureaucracy —these are heady times.

Considered “beachfront property,” a twisted metaphor if there ever was one, some of the airwaves in the 700 MHz band used by UHF channels that once blasted “Gumby” reruns 24-7 are being given to public safety organizations and first responders. The rest are to be auctioned off by Uncle Sam for billions of dollars to existing or wannabe monopolists, including Reed Hundt, a former head of the Federal Communications Commission. Too bad. Electromagnetic spectrum coupled with innovative technology is one of the few examples where public use vs. private ownership has already been proven out. It should be made open to everyone.

NYT: Hot Stocks and Vice Precedence

Should you care if the companies you invest in have a dark side, if they make money in ways that might end conversations at cocktail parties or operate in the same slop bucket as the seamy underworld you’d rather not have your name associated with?

Back 10 years ago in my hedge fund days, one of our greatest investments was this tiny little tech company that made laser diode drivers. The stock was $3 a share and no one cared about it – heck, I had to look up what a laser diode driver even was. These little devices could turn read-only DVD drives into ones that could also record. Pretty cool. We figured that someday, VCRs would be obsolete. We were way too early on that, but sometimes, you just have to be in the right neighborhood. These $2 lasers also enabled the CD drive on your computer to record onto read/write CDs. But big deal. No one cared — until Napster came along and everyone and their uncle began illegally downloading music and buying CD-RW drives so they could burn discs for their car or portable CD players.

At the time, maybe 1 percent of PCs shipped with these read/write drives, but a few years later, 95 percent of PCs had them. Sales boomed, profits went through the roof and we sold the stock between $150 and $200 (makes up for all the $3 stocks that went to $1), all because law-abiding citizens like me (and admit it, you) didn’t feel all that bad ripping off music companies – maybe because we figured they have been ripping us off for years.

NYT: In Medicine, It's Man vs. Machine

Last week, a new study showed that radiologists don’t need no stinking machines. Radiologists read mammograms, at $120 a pop, to look for breast cancer. One out of every 200 films shows a suspicious pattern the radiologist recognizes from years of experience. It’s tedious work in a dark room with a magnifying glass. And mammograms are often read twice — another $120. A new system called computer-aided detection, or CAD, can identify the same patterns a doctor can, by referring to a database of known cancer films. And now a third of all second mammogram readings are done by CAD, for $20 each. But the study from the University of California, Davis, showed that a radiologist with CAD was statistically no better than a radiologist alone in finding cancer. Round 1: Doctors.

Yet what’s amazing about this is not that the dog can’t speak English so well, but that the dog can speak at all. A machine can read mammograms! The value of CAD is not in assisting radiologists but in getting rid of them. A better study would use the CAD system to read all mammograms and, in the few cases with suspicious patterns, call in the radiologist for a second read. But what radiologist is going to volunteer for that study?

Ever cheaper technology is making its way into medicine in fits and starts. In the many industries it’s transformed, technology works by getting rid of the people in its way — operators, tellers, travel agents, librarians, stock traders and on and on.

NYT: A Fork in the Road for Google

Whenever companies sue each other, my ears perk up. Not that I really care who wins, but lawsuits often showcase hidden vulnerabilities. Inevitably, as the fight plays out, the market thinks a lot differently about the long-term prospects of both parties, and money often sloshes away to play elsewhere.

The Internet has been all cute and cuddly throughout its childhood, given a pass for youthful indiscretions like stealing music and video clips. That just ended with Viacom’s copyright infringement suit against Google. By the time this lawsuit and others are finished, Google may have to change its way of doing business. That would be a shock.

Viacom, which owns cable channels like MTV and Comedy Central, recently charged Google with blatant copyright infringement for hosting 160,000 clips of Viacom shows and then having the audacity to allow bored workers and kids at home to view them 1.5 billion times. Viacom had to sue to protect itself because, well, beneath the surface, Viacom and Google are both in the same business, selling ads. For all Google’s claims to be a technology company, 99 percent of its business is ads — for essentials like megapixel cameras, poker sites and ambulance-chasing asbestos lawyers.

NYT: Sloshing

Left to their own devices, and couches, humans instinctively resist change. Kings and C.E.O.s like it at the top. Workers don’t volunteer to give up their jobs in the name of progress. Profits and productivity may create wealth, but how it gets into the right hands is another matter. Money doesn’t flow — that sounds so planned. It sloshes. There’s a difference. As scary as it sounds, it’s the chaos of markets that keeps us well fed and out of trouble.

You work, you get money. Congratulations. After covering bare essentials like food, shelter and a high-definition plasma TV, you save the rest. You can shove it in your mattress, but central bankers like our Federal Reserve, who haven’t the foggiest clue how much money is needed to run our economy, print more money every year. They target 2 percent inflation, which is another way of saying that they overprint dollars by 2 percent, diluting your worth. How rude. A 2-percent haircut by your very own government. Annoying, but it’s been going on forever. The Roman Emperors debased their coins from 4.5 grams of pure silver to less than a 10th of a gram over a few centuries. Deal with it. Stored wealth is an oxymoron - Weimar, Germany and Argentina are more modern diluting disasters. Don’t get mad, get even.

Liza Minelli insisted that money makes the world go around (along with that whole “life is a cabaret” nonsense), but it’s really the opposite: money goes around the world looking for profits — peeking in skyscrapers, factories, alleys, even gutters. Money sloshes around the globe seeking its highest returns, on a risk adjusted basis.

NYT: It's a Profit Deal

Needing relief from medieval churches and cutesy cafes on a trip to Prague a few years back (O.K., and a tax break), I paid a call on the Prague Stock Exchange, tucked in a blocky, Soviet-style building off the main drag. I climbed a few flights of poorly lit stairs and entered a dour, dusty-musty office. I didn’t expect John Thain clapping with happy C.E.O.s at the opening bell, but heck, this place might as well have been a D.M.V. I started pining for stained-glass windows again. Nonetheless, I learned more in the next 20 minutes about how the world works than I had in the last 20 years sweating on Wall Street as an analyst and running a hedge fund.

Back home, everything on Wall Street is beyond complex: Men in funny sports coats grunting and littering the floor of the New York Stock Exchange. Dow Jones industrial averages rising and falling in seeming random correlations to sunspots or something. Million-dollar bonuses to traders younger than that Rolling Stones T-shirt in the back of your closet. Derivatives. Rate hikes. Credit swaps. Sub-prime loans. Discounted free cash flow. Man, this stuff is harder than Chinese arithmetic. I craved for a simple explanation on what it all meant. It was right in front of me.

There in the Prague office I spoke with a nice chain-smoking gentleman in an ill-fitting suit who was no doubt a district member of the Party a decade earlier. I quickly learned that, duh, there is no Prague Stock Exchange, not physically anyway. It’s just a bunch of computer servers sitting in a backroom that match trades all day. O.K., I get that. But how is it that the Czech Republic has stocks to trade in the first place? One day the government owns every business, bloated with beer-breath bureaucrats, and bleeding money if they ever bothered to check. And then one day, boom, the Berlin Wall falls, Prague is wrapped in Velvet, and the next, you have capitalism? Tricky transition.

WSJ: Weekend Interview with Facebook's Mark Zuckerberg

Where are you from? “Dobbs Ferry.” What’s your major? “Mostly computer science but also psychology.” Where did you live? “Kirkland House at Harvard.”

I’m meeting with Mark Zuckerberg, founder and CEO of Facebook, and have already run through the extent of my social networking skills from college. If that didn’t start a conversation, I usually headed back to the bar. Fortunately, Mr. Zuckerberg is not only a programmer, but a talker as well.

On the third floor of your average downtown Palo Alto building, I meet Mr. Zuckerberg after walking through a large room filled with tables and lots of large screen monitors manned by mostly young men wearing the only thing that distinguished this workplace from a hedge fund—T-shirts.

Mr. Zuckerberg’s creation, an Internet service that allows students to post personal information and photos, is nothing short of a twister sweeping college campuses, keeping millions up to date on their friends’ lives and dating status. There was a reputed $1 billion plus offer from Yahoo!, turned down, natch.

Even more remarkable is that Mr. Zuckerberg is all of 22 years old. What is it that made Facebook become so valuable in less than three years? And will 22-year-olds with 200 employees come up with all the good ideas from now on?

Wired: Make Backdating a Thing of the Past

How the tax man can help get us out of this options mess.

http://www.wired.com/wired/archive/15.03/start.html

As you read this, hundreds of Silicon Valley CEOs are under their desks in full duck-and-cover mode, fearing that the Department of Justice or a shareholder mob might pounce at any time to cart them off for "backdating" or "spring-loading" stock options. The paranoia has gotten so bad that corporate lawyers from San Francisco to San Jose are charging $600 an hour to scour records, all in an effort to clear companies’ reputations before they get besmirched. And it's a good thing — the "everyone was doing it, even Teflon Steve Jobs" defense doesn’t appear to be working.

Whose fault is this? Greedy CEOs? Ambitious human resource pros? The Securities and Exchange Commission? The Financial Accounting Standards Board? Congress? The Immigration and Naturali­zation Service? In some respects, all of them, but the root cause may be the Internal Revenue Service. And that agency holds the key to avoiding the problem in the future.