Business


(Way out of date, but what the heck.)

A very funny blog from a friend, but too much cliche and too far from truth (as if I know it).

I-bankers are not the cause of the current crisis, nor are they getting the most part of the “undeserved” bonuses, or have they ever been. At least if you define “i-banker” in the traditional and strict sense.

I-bankers mostly do IPOs and other security issurance, and deals (merger and aquisition). They do get outrageous commision, but that’s only one sea in the vast financial oceans.

Senior execs, traders, and quants are the driving force of the industry, and they get the lion share of compensation.

Now even people from Rwanda know that the current global economy crisis roots from mortgage-backed securities. But that’s just one manifest of the massive and inherent problems of derivatives modeling and trading.

The now defunct i-banks used to have most of their business in traditional i-banking and as broker/dealer, which is to help clients (institutional and individual investors) trade. Then they discovered the amazing power of computers and mathematicians, and started to use their own money (proprietary trading) and clients’ money (asset management) to trade securities, based on ever complicating models.

Goldman Sachs (and earlier killers like Salomon) made a killing. Everybody followed suit. They have to keep finding new things to trade, as arbitrage disappears and profit margin thins in established markets as they become well-known and level playing fields, and dinosaur banks move in.

Then climates changes and extinction comes.

Advertisements

My previous failed company tried to sell our junk to H-W’s mobile unit. I knew it’s Li Kai-shing’s conglomerate, but nothing more.

This morning I saw the name Whampoa Military Academy in a book and it dawned on me what Whampoa is. What an ignoramus, as I’ve always been.

So I looked up H-W’s history. It’s mainly from 3 companies:

  1. 屈臣氏: 1828廣東藥房. 1841 became香港藥房. 1863屈臣氏. 1963 Hutchison bought it.
  2. 香港黃埔船塢公司: 1863. 1977 Hutchison bought it.
  3. Hutchison: 1877 John Duflon Hutchison changed Robert Walker & Co to Hutchison. 1979李嘉誠bought controlling stake as the first Chinese for a British company. 1983 first mobile service in Hong Kong. 1995 world’s first CDMA service. 1999 tom.com.

With Google News, I thought I’d never read any newspaper again. But to my surprise, in the last several months I’ve enjoyed WSJ on my morning commute. Part of the surprise is that I could stay awake to read.

My favorite has been the quirky bottom-first-page story, and this one from last Saturday is the best that I can remember (which means within the last couple of days), as it’s the best illustration of the financial crisis that I can remember (in a slightly longer timeframe).

You should really read the whole thing, and then see all the pictures. Just amazing and freaking unbelievable, but that’s exactly how we got into this mess.

These numbers really say it all:

  • The “house” has 576 sq ft (about the same size as our living room plus den) with 2BR/1BA.
  • The owner, Ms. Halterman, said that at one point there were 23 people living there, ~25 sq ft/person, on par with a sweat shop dorm.
  • She bought the house with $3,500 40 years ago.
  • “She receives about $3,000 a month from welfare programs, food stamps and disability payments related to a back injury.”
  • She owed $36,605 on a home-equity loan in 2006, and got a $75,500 credit line. Then in 2007 Integrity gave her a $103,000 30-year ARM starting at 9.25%.
  • How much money everybody in the food chain made:
    • Appraiser: $350. The appraisal is $132,000.
    • Integrity: $6,153 at closing, then $3,090 when it transferred the mortgage to Wells Fargo.
    • Wells Fargo sold it to HSBC, and S&P rated the MBS (probably CDO) AAA. The article didn’t say how much these guys made, but you can be sure they got bonuses many times of $11,090.33, the amount that Ms. Halterman got at closing.
  • After foreclosure, the house was sold at $18,000 to the wealthy next door neighbor so they can tear it down. That’s 17.5% of the mortgage.
  • “After expenses, investors in the mortgage-backed security will probably divide up no more than $15,000 in proceeds.”

According to a CPI calculator, $3,500 in 1967 = $21,727.46 in 2007. Using the inflation adjusted number, $103,000 (4.74 times) makes annual growth at about 4%. According to http://mysite.verizon.net/vodkajim/housingbubble/, nominal US median house price went from ~$20k in 1967 to ~$225k in 2007, and inflation adjusted price from ~120k, a mere 1.5% per year (1.83 times). So the “little shack on the desert” is really the highest flying bubble of all.

I agree with one of the comments that we should applaud Ms. Halterman. Sure, she has plenty of her own problems with drug, alcohol, trash, etc. But she managed to feed many people and raise numerous children, some foster. (Though it’s a different issue how they will live their lives, as her own son is now in prison.) We cannot expect someone like her to use Quicken to track her cashflow and some online “how much mortgage can you afford” calculator.

I also heard a story on NPR the other day about an immigrant single mom with 3 kids in Brooklyn. She earns minimum wage, and yet got a half million mortgage on a relatively large house. Monthly payment is a few thousand, and she only paid a couple of months.

The last paragraph in the piece is a real gem:

A few weeks ago, Mr. Arce (the new owner) asked Mike Summers, a city code-enforcement officer, whether a permit was required to raze the blue house.

“Yes,” Mr. Summers replied, “but all you need is the big, bad wolf to come out and huff and puff.”

Fill in anything you like: Lehman, Merrill, financial system, everyone…

Who will be the next? AIG? WaMu? Will Paulson & Co. keep cherry picking whom to rescue and whom to dump? Will Goldman and Morgan rule the world, or will they be sold to a consortium of sovereign wealth funds like ADIC, CIC, GIC, and the like?

I hope Roger Lowenstein is still around to write a book about 2008, the Judgment Year.

Lehman’s employees hold about 1/3 of its stock, therefore many lives will be totally crushed, unlike people in Bear and Merrill, who at least got their stocks in the dollars. They’ve had super overpaid years for sure, but no hard working people deserves this.

No, not the cartoon.

J printed out an article and let me read it, which describes the main character as a plumber (a fix-it-up man) with a Buzz Lightyear look. That’s enough to make a good article.

John Thain’s career is just rock solid, like his reputation and personality. Growing up in a small town in Illinois, he got BSEE from MIT (so he can really change a bulb) and MBA from Harvard. Shortly after he joined Goldman, he was among the few chosen ones to establish an MBS division reporting directly to Jon Corzine, then head of FI. So it was interesting when Corzine fought with Hank Paulson over the issues of Goldman IPO, Thain was in Paulson’s camp, and he wouldn’t be where he is had he sided with his old boss.

Here’s how Thain described Goldman’s culture, which seems like the only culture there should be and could be for a truly successful company as Goldman, or a country and society at large:

“It’s a culture based on teamwork. It’s a culture based on excellence. It’s a culture based on being a great meritocracy. People get ahead based on how good they are, not who they know or how well they can play politics. And that culture is very strong and very successful.”

The article also points out the other two well-known crucial aspects of Goldman’s continuing (and now almost solitary) success and profit on Wall Street: superb and foremost risk management, and group (thus individual) compensation tied to that of the whole company. I cannot imagine any other strategy that can serve as the foundation of long term success.

What makes the article extra good is the way it talks about Stan O’Neal. It’s too easy to bash and trash him now, but the article rightfully acknowledges his efforts and tactics to make Merill rather successful after 9/11, even though they sowed some poisonous seeds. One particularly dooming thing is the “everyone for himself”, a.k.a. dog-eat-dog ethos.

I recently read Michael Shermer’s The Mind of The Market, but never got time to write about it. One thing I remember from the book is that the cultural change Jeff Skilling imparted on Enron was one of the main reasons why it went berserk for revenue and risk and fraud. Take a guess: was the Skilling culture is more towards teamwork and long term success, or dog-eat-dog and short term stardom?

Mindmeters mentioned an old piece by Graham, which I must have read then. Lately I was forced to deal with my previous company again, and it reminded me to make this check list. Bold items apply. Start counting!

  1. 孤家寡人 (Single Founder)
  2. 缺少地利 (Bad Location)
    “Even in New York the number of startups per capita is probably a 20th of what it is in Silicon Valley.” So NYC is closer to bad than good location.
  3. 领域偏狭 (Marginal Niche)
  4. 拾人牙慧 (Derivative Idea)
  5. 固执己见 (Obstinacy)
  6. 遇人不淑 (Hiring Bad Programmers)
  7. 平台不当 (Choosing the Wrong Platform)
  8. 发布迟缓 (Slowness in Launching)
  9. 发布过早 (Launching Too Early)
  10. 无的放矢 (Having No Specific User in Mind)
  11. 资金太少 (Raising Too Little Money)
  12. 花销无度 (Spending Too Much)
  13. 资金太多 (Raising Too Much Money)
  14. 资方制肘 (Poor Investor Management)
  15. 牺牲用户 (Sacrificing Users to (Supposed) Profit)
  16. 自命清高 (Not Wanting to Get Your Hands Dirty)
  17. 内部争斗 (Fights Between Founders)
  18. 三心二意 (A Half-Hearted Effort)

I changed some translations to keep the 4-character rhyme. Isn’t Chinese great for this?

Graham didn’t say how many strikes are considered out, but 10 out of 18 is a surety in any measure, I suppose.

This week’s Cringely column gave a fun anecdotal about Sun’s origin. According to the then Stanford University Network czar, Andy Bechtolsheim built a cheap Unix box for Stanford, and CIA wanted it, but Andy couldn’t find any company willing to manufacture the box, and so it went.

I read about the Fab 4 reunite a while ago. It seems like a fabulous combination indeed: a software guru, a hardware guru, a biz guy, and an engineer-MBA-VC (later). Two Americans, one Indian, one German.

Next Page »