So Long, Farewell

James Ledbetter — Fri, 30 Jul 2010 19:46:51 +0000

By now you may have heard that TBM is closing up shop. Slate Group chief Jacob Weisberg explains the reasoning here. It's obviously not the outcome we intended, and I'd like to thank all our loyal readers and advertisers for their support over the last two years. Our archive of stories and blog posts, we're told, will continue to live on Slate.com.

J.P. Morgan and Carlos Slim Lose. Will The New York Times Cover It?

James Ledbetter — Mon, 26 Jul 2010 21:30:29 +0000

On Friday, federal judge Jed S. Rakoff issued an order blocking JP Morgan Chase (JPM) from selling any part of a 2007 credit agreement between itself and Mexican media giant Televisa to any entity controlled by Cablevision's largest rival, particularly Banco Imbursa. This latter company is the empire of Carlos Slim, the largest outside investor in the New York Times Co. (NYT).

Rakoff's decision is a striking rebuke to JP Morgan, which had tried to sell a $225 million loan it made to Cablevision—a client of the bank for 20-plus years—to a bank controlled by Slim. This peculiar move would have forced Cablevision to turn over tons of corporate secrets to its rival. Rakoff's ruling on Friday comes as little surprise, given that earlier he had called JP Morgan's proposed sale "an end-run, if not a downright sham."

Responding to Rakoff's permanent injunction, Televisa's CFO issued a statement saying: "We are gratified by the judge's ruling." JP Morgan's press office told me it declines comment.

I wrote about this back in February, noting that for some reason, the New York Times had not covered the story that, at best, casts its corporate sugar daddy in a questionable light. As best I can tell, it has not done so since. We'll see if they find it fit to print.

UPDATE, July 27, 9:30 a.m.: Bloomberg has published a story on Rakoff's decision, as has The Wall Street Journal's Deal Journal blog. I still can't find any trace of the story in the Times.

Annulling an iPhone 4 Contract Not as Pleasant as Steve Jobs Suggests

Martha C. White — Fri, 16 Jul 2010 21:52:01 +0000

So "Antennagate" is over, or it never happened in the first place, depending on whose reality channel you subscribe to. Steve Jobs announced that while the iPhone 4 is still the best phone in the universe, Apple (AAPL) will relent and provide owners with free bumper cases if they want to insist on holding their handsets the "wrong" way. Jobs went on to say that although the iPhone 4 had a return rate of 1.7 percent, really dissatisfied users could return the device without paying the usual 10 percent restocking fee. He also added that he believed AT&T would allow for penalty-free contract cancelation.

A call to AT&T (ATT) clarified Jobs' sort-of promise, but there's a caveat. An AT&T spokesman told The Big Money that the company offers a standard 30-day grace period in case buyer's remorse kicks in. The clock starts on the day the phone is activated, so those stuck waiting on a back-ordered white model don't have to worry. However, die-hards who waited in line to snap up a new iPhone on the June 24 release date have just over a week to decide if they want to keep their prize. After that, you can return the phone, but you'll have to pay to cancel the contract.

Presented By:

Fri, 16 Jul 2010 21:52:01 +0000

Man Suing Facebook Has History of Fraud

James Ledbetter — Tue, 13 Jul 2010 14:33:04 +0000

By now you may have read about the lawsuit from a New York State former contractor, who claims that his agreement with Facebook entitles him to 84 percent of the company. Paul Ceglia signed a contract with Facebook in 2003* that supposedly gave him 1 percent in the company for every day beyond what it took him to do the work; a copy of the supposed contract and suit can be found on Scribd.

This suit may or may not have merit. But we think it's worth pointing out that Ceglia is not exactly free of scandal. Last year, Ceglia and his wife were charged with grand larceny and fraud, according to the Wellsville Daily. Apparently they took people's money to provide wood pellets but didn't deliver. The attorney defending Ceglia on those charges is the same one who's filed suit against Mark Zuckerberg and Facebook. How Zuckerberg ever hooked up with this guy in the first place might make a good tale, but the suit seems unlikely to get beyond a check-writing settlement.

*CORRECTION (July 13, 2010): Due to a typing error, this post originally said that Ceglia signed a contract with Facebook in 1983 instead of 2003.

The Newsweekly Is No More Dead Than Epic Poetry

Chris Marcil — Fri, 25 Jun 2010 16:07:37 +0000

"I'm a big believer that nothing ever actually goes away," [Time editor Rick] Stengel says. "People still ... write epic poetry. Beautiful print magazines will always exist."
—"TIME Magazine, The Last of the Big Newsweeklies," National Public Radio story, June 23

Summarize, Muse, events of the week past
In News, Lifestyles, Entertainment, Sports,
Fill our pages with pull quotes, directed art,
Hot trends that help you understand your teen,
And recent health news on, for example, fiber.

As golden wheat, which from the soil springs,
Journeys from the prairies to be processed
In bright Satanic mills, where focus groups
And salt, and syrup of the corn, combine
To turn rough nature into bags of snacks
Munchable while reading magazines—
So we Reality process, adding tons
Of high-fructose conventional wisdom
Pleasing to our average reader’s palate,
And call this manufactured product “News.”

Washington Post Is the First Circuit-Broken Stock

James Ledbetter — Thu, 17 Jun 2010 00:08:36 +0000

The age of the stock-market circuit breaker is here—and it’s been tested pretty close to home. At 3:07 p.m. Wednesday, someone placed an order on the New York Stock Exchange’s Arca electronic trading platform to buy 200 shares of stock in the Washington Post (WPO) company (which owns The Big Money). Nothing unusual about that, except that the price was $919 a share—about twice the amount of the previous trade, and a level the stock has not seen in years.

Two more trades were executed at similar prices, and then trading in the stock was automatically suspended, according to Ray Pellecchia of the New York Stock Exchange. The new rules, which went into effect last Friday, apply to stocks in the S&P 500, and mandate a trading halt if a stock’s value changes more than 10 percent in a five-minute period. This, of course, is the regulatory response to the “Crash of 2:45” that took place on May 6.

The trades on WPO appear to have been mistakes, or what is known among traders as a “bad print,” and were cancelled at 3:24. The stock resumed trading at its normal level, and closed the day slightly up.

Does this mean that we’re going to see a lot of automatic pauses in trading? After all these kinds of errors appear to happen with some frequency. “A little early to tell,” says Pellecchia. Will they prevent gut-wrenching drops like the May 6 debacle? They should, but with so many automated exchanges out there, it’s tough for anyone to be certain.

TBM Exclusive: Fake BP PR Tweeter Unmasked

Chadwick Matlin — Mon, 14 Jun 2010 18:40:57 +0000

For the last two months, one of BP’s sharpest critics has been a guy pretending to be a BP employee. After the explosion in the Gulf, somebody who goes by “Terry” started a Twitter feed, @BPGlobalPR, that masquerades as BP’s official corporate account. Multiple times a day, Terry writes a satirical tweet laced with a pinch of outrage. (Sample: “Freedom of the press is an American ideal. We're a British company. You do the math.”) More than 160,000 people follow the drama, even though nobody knows exactly who’s behind the feed.

Monday, Terry made a rare public appearance at Twtrcon, a confab dedicated to the people who use Twitter to do business. Among this crew, Terry is enjoying his 15-minutes—he’s a viral sensation who has succeeded where official Twitter accounts have failed. At the conference, Terry tried to channel Stephen Colbert and remain anonymous and in character. He showed up wearing a ski mask, top hat, and fake nose, and maintained that he is a legitimate BP tweeter. It’s the other, authentic accounts that are the fake ones.

(image from TWTRCON’s tweetphoto feed.)

As he ran out of the conference, The Big Money ran alongside, TMZ-style. He remained in character while TBM asked him questions, but couldn’t keep up the guise once outside. The taxi drivers were too suspicious to let him in while he had a ski mask on. Reluctantly, he peeled his mask off while running from cab to cab, waiting for someone to let him in. While he was exposed, TBM managed to get a picture. Thus, we present the first image of @BPGlobalPR, unmasked:

Does Chris Anderson Even Read His Own Tweets?

James Ledbetter — Tue, 08 Jun 2010 16:10:59 +0000

A little more than a year ago, I went after Chris Anderson's book Free: The Future of a Radical Price. I argued that if the idea behind the book had any real merit, Anderson would presumably be able to persuade the people who own Wired magazine (which Anderson edits) to give it away for free. Since they don't, there is clearly a hole in the argument.

I recognize that Anderson's thesis is more complex than that, but I was hardly alone in finding the book to be intellectually unsupportable and often head-thumpingly wrong; Malcolm Gladwell, among others, also couldn't make Anderson's model work.

Anderson, and several TBM commenters, tried to rebut my review by pointing out that Wired does, in fact, give away its content online. For example, on June 30, Anderson tweeted at Jason Pontin: "And all the content I manage at Wired is free online."

For reasons I've articulated elsewhere, I don't think making the content available online vindicates Anderson's argument. But more importantly, Anderson's claim is apparently untrue. As TBM blogger Marion Maneker points out, Anderson tweeted this weekend that "about a third of Wired Mag content is now iPad (and print) only." In case it's not obvious, readers have to pay for the print magazine and the iPad app.

Now I know that Anderson's argument is that "free" is but one price among many in a successful business strategy. Even so, Wired is evidently moving away from, not toward, giving its content away, which again undercuts Anderson's thesis. Also, is it too much to ask Anderson to read his own writing? It doesn't cost anything.

Pay $1,500 To Hear Why Everything Should Be Free

Chadwick Matlin — Thu, 03 Jun 2010 21:25:44 +0000

This publication is on record as thinking Wired editor Chris Anderson is misguided. “Why doesn’t Wired magazine practice what its editor preaches?” we asked in 2009. At the time Anderson had just released a book, Free: The Future of a Radical Price, that argued businesses would make the most money by trying not to make any at all. This while his magazine still charged $10 a year for a subscription.

It was with great delight, then, that I received an e-mail from Wired magazine this afternoon. It was a message inviting me to their “Disruptive By Design” conference, a one-day affair with CEOs of companies that are changing industries, etc. etc. Chris Anderson will, naturally, be hosting the affair.

The cost: $1,495. We’re living in the future of a radical price, indeed.

(TBM has a conference of its own coming up, for just a third of the cost of Wired’s. It’s on e-readers, the future of publishing, and all that stuff media types like to carry on about. If you’re intrigued, click here for more details.)

Roddy Boyd Goes Solo

James Ledbetter — Thu, 03 Jun 2010 04:05:14 +0000

Regular TBM readers will recognize the byline of Roddy Boyd. A former business writer for the New York Post and Fortune (where he and I worked together), he's written a couple of spectacular investigative stories for us, including the most sweeping piece on the alleged fraud behind Spongetech, a company that was until recently one of the most important sports advertisers in the country. Last month, Spongetech was indicted by federal prosecutors and charged with fraud by the Securities and Exchange Commission.

Boyd's brand of enterprise journalism is hard to do. In an era when Web sites are content to cash in on page views that merely cannibalize the work of other reporters, Roddy Boyd still practices old-school methods: wearing out the shoe leather, the tough phone call, and endless document dives. It's time-consuming and sure to win enemies.

So it's heartening to learn that Boyd has launched his own Web site, The Financial Investigator, which aims to keep this important muckraking alive. In a group e-mail, Boyd described his project:

The work of financial enterprise is hard, the pushback eternal. Moreover, 1,500 words on some scummy off-shore financing rig or opaque related-party dealings don’t seem to fit cleanly in a tweet or other social media. The corollary holds true: a “list” or “profile” isn’t going to get at the core of why a company’s cash-flow is way behind its net-income. Whatever you think of me, or others who’ve done this sort of work, I would hope we all can agree that companies, their promoters and the flak/legal complex shouldn’t have the field all to themselves.

Amazingly, Boyd says in a disclosure that there will be no money made here. He won't take donations, advertising, or work with partners. We salute him in his new endeavor, and look forward to the scoops.

Get Into TBM's E-Reader Conference—on the Cheap

TBM Staff — Wed, 02 Jun 2010 20:13:13 +0000

The Big Money's conference—Untethered 2010: Profitable Media in the Tablet Era—is only two weeks away. We have a dynamite line-up of panelists to discuss the business of e-readers and tablets, including Vivian Schiller, CEO of National Public Radio; Carolyn Reidy, CEO of Simon & Schuster; Brian Murray, CEO of Harper Collins; Sarah Chubb, president of Conde Nast Digital; Phil McKinney, vice-president and CTO of the personal-systems group at Hewlett-Packard (HPQ); Tom Turvey, director of strategic partnerships at Google (GOOG); and our bosses' boss, Don Graham, CEO of the Washington Post Company (WPO).

Tickets are going fast for this all-day event, but for a brief time TBM readers can get a 20 percent discount. Here's how to do it: Register here, and when prompted, use the code TBMSAUS, and we'll take 20 percent off for the first five readers.

Will an IPO Save Zipcar?

James Ledbetter — Tue, 01 Jun 2010 15:05:28 +0000

It was hardly a surprise to learn this morning that Zipcar, the Boston-based car-sharing service, has filed documents for a public offering. The company has had all the trappings of an IPO-in-waiting for years: state-of-the-art technology, a somewhat cultlike following, tens of millions in venture capital spent.

The company was founded in 1999 and has still never posted a profit. Back in 2008, TBM's Chadwick Matlin noted in Slate that Zipcar was saying it would break even either by end of '08 or by 2009, but that didn't happen. The S-1 filed with the Securities and Exchange Commission shows that the company shaved its losses to about $4.7 million in 2009, but already in the first quarter of this year it's lost more than $5.3 million, so the path to profit remains elusive.

I have been a reasonably satisfied Zipcar user for a few years, but I see two major problems with Zipcar's business. One is that Zipcar pays for drivers' gas. That's attracted a lot of customers, but also put tremendous strains on Zipcar's expenses. The second is that renting by the hour—one of the early supposed advantages of Zipcar—is increasingly available from more traditional rental companies like Avis and Hertz. So while I have little doubt that Zipcar will be able to raise the $75 million it's planning on from this IPO, the company's long-term prospects seem stuck in neutral. TBM's Matthew DeBord will weigh in with a more developed take later today.

TBM Readers Respond: Buy Health Insurance, Mark!

TBM Staff — Thu, 27 May 2010 20:11:26 +0000

Mark Gimein’s piece on the new health care plan has generated some healthy discussion from TBM readers. Gimein wrote that—given his own personal circumstances—it makes more sense pay the government’s penalty for not having insurance rather than purchasing a plan. Here's what some of our readers had to say in the comments:

Billy thinks that he’s right:

Whether the author is making a financially reasonable decision to not have health insurance may depend on his net worth as well as his overall health. If he does not have many assets then a bankruptcy as a result of big medical bills may not be a big deal. In a bankruptcy, they might even let him keep his home and retirement assets? If he has assets that would be lost in a bankruptcy then he may not be making a wise gamble though.

Labradog has a different point of view:

As a male in your 30s, you're far more likely to suffer accidental trauma than cancer. Good luck with bankruptcy from a car crash injury.

Ouch. That's a harsh repsonse, but it's one that commenter -k- agrees with:

Exactly. The cost of emergent care could quickly surpass the yearly premiums quoted here.. go ahead and try registering for insurance with a skull fracture. Still, health care 'reform' clearly didn't go far enough, and this is a good, if bonebrained, example of how it's failed.

Do you think that Gimein's decision is financially savvy or just plan foolish? Join the discussion in the comments section of the article here.

Presented By:

Thu, 27 May 2010 20:11:26 +0000

Explaining to Felix Salmon Why Movie Derivatives Could Be Dangerous

Heidi N. Moore — Tue, 25 May 2010 19:07:04 +0000

I was a bit surprised to see Reuters' blogger-in-chief Felix Salmon question the motives of Max Keiser in Keiser's "u-turn" on movie derivatives. Keiser, you'll remember, was quoted in my article of today saying that he regretted creating movie derivatives and compared his role to that of atomic bomb creator Robert Oppenheimer. Max Keiser can certainly speak for himself, but since Felix invited me into the debate, I'll join in.

In pursuit of his argument, Felix says movie futures are nothing to bother our collective pretty little heads about: "Moore’s article, with Keiser’s interview at its core, is scathing about the pretty benign prospect of box-office futures. ... The point, of course, is that we don’t need to effectively regulate movie star futures, since they’ll be traded on an exchange and will pose no systemic risk."

How Felix knows this point on systemic risk, he doesn't explain. It's hardly conclusively true that securities traded on exchanges don't pose systemic risks; we simply don't know, since derivatives trading doesn't really exist on a scale where we can appreciate the full effect. The vast majority of derivatives are bespoke, or contracts tailored to the specifications of two parties. We do know, however, that badly structured derivatives based on weak collateral do reliably cause systemic risk, as did the synthetic CDOs that afflicted all the major investment banks and AIG.

Besides, the idea that trading derivatives on an exchange eliminates systemic risk is very hard to justify. By being on an exchange, derivatives will only be more "transparent," whatever that means. (It pays to be skeptical, because derivatives do tend to veer toward complexity.) But that doesn't make them less risky. The idea that people won't bet on risky securities just because they can see the risk is one that was handily debunked during the mortgage crisis. As any short-seller will tell you, it was very possible to do the homework on mortgage securities. A lot of investors—even sophisticated investors—simply did not.

This kind of laziness happens because Wall Street is not as good at judging inherent risk as it would like people to believe. Wall Street is good at judging short-term profits: People will buy into a bubble and sell into a crash no matter what our laws are. If an asset is "bad," but is rising in price, that's still a good trade to make in many traders' minds. It will be no different with movie derivatives.

And then, to Felix's airy point about "no systemic risk," there's the issue of debt. One could argue that certain bonds or mortgage securities were not a systemic risk 50 years ago, but that's the funny thing about derivatives: They magnify things that aren't inherently problematic into systemic risk. The bond markets are modestly sized, but throw in the issue of credit derivatives and all of a sudden the exposure—notional, true, but still powerful—is in the tens of trillions of dollars. Or consider how the subprime mortgage market, a relatively small part of the overall market, spurred a massive recession when it finally crashed: It was due to the prevalence of derivatives that magnified those losses by adding leverage to them, to the point where no bank or government could cover the debt they then owed. All bets are off when leverage enters the equation, and it surely will when it comes to movie derivatives. Keiser does strongly believe that it is inevitable that Wall Street will throw leverage on those derivatives as soon as possible, and I find his case incredibly persuasive. Leverage is the grease for the machinery of derivatives.

And it is certainly not silly to think carefully about what we're getting ourselves into; the history of financial markets for the past 25 years has been the gleeful embrace of any and every new product with little thought as to its consequences. Felix is setting himself a very hard task if he is arguing against the usefulness of using historical behaviors—such as AIG—as a useful parallel for simply thinking things through.

But the chief problem with movie derivatives is this: They have no real collateral, no stable, valued asset at their core. The biggest danger to financial markets, as we have seen, is highly priced securities that have weak or no collateral behind them: Think of those subprime mortgages or Internet stocks. When you create a derivative based on movies, what is it really based on? It is based on the box-office receipts of opening weekend. That is not collateral, and is in no way substantial; as Keiser says, it is pure hype. Such airy nothingness should not provide the support for the price of a derivative that people can buy or sell—and more importantly, manipulate and lose money on.

One may counter—as supporters of the movie derivatives business have—that we have other derivatives or prediction markets that are not based on assets. We have, for instance, a thriving market in weather predictions. The difference is that you cannot change the weather by betting on it or hedging against it; you can change a movie's opening weekend if you do, simply by the fact that what was once opinion now would have the power of a giant financial market.

But to tell the truth, at one point while reading Felix's post I forgot about entirely about Max Keiser's alleged U-turn on movie futures and started wondering about Felix's own U-turn on financial innovation, which he certainly did not think was so benign last year:

And if you look at how fast the US economy managed to grow in the '50s and '60s without the benefit of Black-Scholes or the Gaussian copula function—or, for that matter, how fast the Chinese economy has grown of late with very strict fetters on financial activities—it looks very much as though most of the financial innovation in recent decades constitutes a history of increasingly desperate attempts to eke out returns in the context of a naturally slowing economy. And that history, I think, is doomed to failure.

We're certainly agreed there.

Warren Buffett Jots Down Jingles In His Spare Time

Chadwick Matlin — Tue, 25 May 2010 12:34:39 +0000

Warren Buffett is trying to become a Saturday morning superhero. In May, the Oracle of Omaha started a new Web series, The Secret Millionaire’s Club. Buffett is the adviser to three kids—Asian Girl, White Guy, and Androgynous Indian—as they wrestle with life’s capitalistic problems. The whole thing is animated, hokey, and shamelessly capitalistic. It’s all very Buffett. TBM is chronicling every episode—each of which has distinct parts: the problem, the capitalism, and the Buffett. The second episode, “Car Wash Capers” went something like this:

The problem: Faced with the budget cuts of every prepubescent American, the kids at Asian Girl’s school are having a car wash to raise money. But it’s hard to raise money when nobody shows up. All the essentials are there—the car wash is cheap, it’s raising funds for a good cause, it’s hand-washed—and yet they’re still washing in a vacuum. Maybe they should spend their money on a new Econ 101 teacher.

The capitalism: When you know what you’re doing but nobody knows that you know what you’re doing, it’s time to advertise. Warren Buffett, the creative genius that he is, composes, stars, and directs the commercial. It’s perhaps the worst ad you’ve ever seen. But nevertheless, the local TV station agrees to air the ad, surely in exchange for investment advice from the Oracle. Soon the suds and the cash are flowing at the car wash.

Buffet’s nugget of wisdom: “Remember, a good idea you can’t communicate is like winking in the dark."

Buffet’s personal detail: “I do write a catchy jingle, if I say so myself.” (Note: If this is catchy, Buffett must have a nails-on-chalkboard compilation album on his iPod.)

Patent Decision Slams TiVo Stock

TBM Staff — Fri, 14 May 2010 18:32:35 +0000

An appeals court wiped out some 40 percent of the value of TiVo (TIVO) stock on Friday morning, by re-opening a longstanding patent dispute with the company's rivals, as Reuters reports. (TiVo's response to the decision is here.) This puts even more pressure on the onetime DVR pioneer. As The Big Money's Chadwick Matlin wrote back in March:

The company’s subscriber numbers continue to drop—TiVo lost 730,000 subscriptions in the last year, as people chose other DVRs, most of which their cable companies provide. That brings them to 2.6 million subscriptions, a small number within the larger scope of television-equipped Americans. And on the face of it, the losses only look like they’re going to get worse. Management is expecting to lose $19 million to $21 million this quarter, due to all the cash the company is spending on product development, marketing, and legal efforts. TiVo has invested too much in too many areas to remain in stasis. The investments will either pay off or they will go bust.

Does Elena Kagan Support Shareholder Rights?

Martha C. White — Tue, 11 May 2010 15:41:04 +0000

The business press is already trying to read the tea leaves when it comes to Elena Kagan. Her lack of a judicial record makes her a cipher, not only on hot-button issues like abortion and gay marriage, but also on corporate issues like shareholder rights.

Kagan's argument in the recently decided Citizens United v. FEC case has been mined pretty thoroughly; in this instance, she held forth a bit to the right of the administration's own stance. (President Obama characterized the case as a power grab for special interests, while Kagan instead chose to parse the more technical question of whether shareholders would be appropriately represented if a company devoted funds to voicing a political opinion.)

Beyond this, though, little is known about how Kagan would rule on business-related disputes. Professor John Coffee, director of Columbia University's Corporate Governance Center, refers to her as a blank slate. Her writings are mixed. In Morrison v. National Australia Bank, a dispute involving a Florida-based subsidiary of the bank, Kagan argued that shareholders don't have legal ground to pursue their case domestically and must take their allegation of securities fraud to the Australian courts. On the other hand, in Jones v. Harris Associates, a case involving mutual fund fees, Kagan sided with investors, arguing that fiduciary duty goes beyond simply disclosing fees. She also wrote a brief in support of Merck (MRK) investors suing the pharma giant for allegedly failing to reveal problems with its blockbuster arthritis drug Vioxx in a timely manner.

If Wall Street is skeptical of Kagan's sympathies, they may be placated by the (rumored) choice of her replacement: Donald Verrilli Jr., the current senior counsel for the White House. Verrelli is best known for arguing a unanimous victory for the plaintiffs in MGM Studios v. Grokster, a 2005 music industry copyright-infringement case.

The Incredible Tale of Spongetech's Fraud

James Ledbetter — Wed, 05 May 2010 17:01:02 +0000

The FBI has been pretty busy in Connecticut lately. In addition to the flurry of activity near New Haven and Bridgeport to catch the alleged Times Square bomber, this morning, Michael Metter, the CEO of Spongetech, was arrested at his home in Greenwich. It’s quite a blow to a company that until very recently was one of the largest advertisers in the sports business. Spongetech last year had standing ads in Yankee Stadium, Citi Field, Dodger Stadium, Madison Square Garden, and during the U.S. Open.

This morning, Metter and Spongetech CFO Steven Moskowitz were charged with several counts of corporate fraud by the U.S. attorney’s office in New York, eastern district. This dramatic development will come as little surprise to regular readers of The Big Money. Last fall, TBM contributor Roddy Boyd wrote a lengthy investigation into allegations of Spongetech fraud, many of which are echoed in the government’s complaint.

What’s really amazing is what happened after the TBM article appeared. As Boyd wrote, Spongetech—a once-public company that makes sponges preloaded with soap—claimed that a huge chunk of its revenue came from five customers: SA Trading Compan, U.S. Asia Tradin, Dubai Export Company, New Century Media, and Fesco Sales Corp.

According to the government, as much as 99 percent of Spongetech’s income came from these five customers. What, according to the government, did these firms have in common? They did not exist.

Once they realized that the government was onto this fact, Spongetech scrambled to make it look like these were real companies, all to prop up earlier statements it had made about sales. In a move right out of the movie Shattered Glass, apparently it hired a tech consultant in Brooklyn to buy domain names like “SATradingcompany.com” and “DubaiExportImportCo.com.” More brazenly, according to the prosecutor’s complaint, the same consultant tried to rent “virtual” office space in five cities, including Miami, Atlanta, and New York. The company made up phone numbers and contact names and even, oddly, ZIP codes.

The two Spongetech officials are scheduled to be arraigned this afternoon. Clearly, this story will continue to unfold, and TBM hopes to follow up on Boyd’s exceptional work.

What the Goldman Conspiracy Theorists Are Still Missing

Heidi N. Moore — Tue, 04 May 2010 19:51:50 +0000

The SEC civil case and other criminal inquiries into Goldman Sachs might seem to be an epic victory for the firm's legion of conspiracy theorists, whose tattered flag was first hoisted last summer by inventive Rolling Stone writer Matt Taibbi.

But, in fact, the conspiracy theorists have less reason than ever to be smug. The information that has emerged in the past few weeks shows that the Goldman conspiracy theorists spent so much time obsessing about the firm's alleged plan for world domination that they missed the forest for the trees (or missed the ocean for the vampire squid, if you will): What Goldman did was so standard, so commonplace, and so multiplied among its rivals that we are only now fully understanding that this behavior was completely pervasive in the financial system. As readers of The Big Money know, Goldman isn't the only bank that sinned. It's just that, for now, Goldman is the only one that got caught.

In the infamous Abacus deal at the center of the SEC's investigation and a Justice Department inquiry, Goldman allegedly allowed investor John Paulson to advise on the creation of a collateralized debt obligation. Usually these CDOs were grab bags of different kinds of mortgages; Paulson, in a relatively innovative move, wanted to stuff his CDO with specifically failing mortgages because he wanted it to fail; buyers, who were used to other kinds of CDOs, presumably didn't know that. Goldman structured the deal, then hired an independent agent, ACA, to approve it in the very definition of a fig leaf. While there are various levels of evidence that some of the parties knew about this—Goldman, ACA, Paulson—it’s clear that the buyers did not. The equivalent in real-world terms might be the supermarket selling you a basket of apples about to spoil but charging you for healthy ones.

Now look at who else created these specific CDOs. Goldman Sachs? Sure. But Goldman was far from alone. According to Gregory Zuckerman's The Greatest Trade Ever, Deutsche Bank also eagerly took Paulson up on the chance to help him create CDOs that he could short.

It looks bad. But to those who know Wall Street, it does not look in any way unusual. Goldman's defender-in-chief, Warren Buffett, admitted as much while he was "talking his book," or protecting his investment to CNBC on Monday. Buffett objected that there was nothing "unique" about Goldman's Abacus deal. Yves Smith, who runs the Naked Capitalism blog, agreed that Abacus was just a common type of CDO. "When there's a mass delusion, you can say everyone is to blame," Buffett said. "There's no villain."

Buffett got half of that right. There's no villain; there are many. The Abacus CDO may not be inherently unusual, but it does look—to the SEC and Justice Department—unusually rigged. This is bad news for many banks because there are probably many more like Goldman, and it won't take many investigations to make the actions taken by other banks during the bubble look absolutely evil in the court of public opinion.

Consider: The bubble in subprime mortgages was horribly disfigured by CDOs like the ones Goldman underwrote—except that Goldman was far from the only one to underwrite them. Merrill and Citi ranked No. 1 and No. 2 in underwriting CDOs—and took far more in CDO-related write-downs—while Goldman was in the lower part of the top five. Merrill, in fact, "revved up its production of complex debt securities—despite a shortage of buyers for them," according to a 2008 Wall Street Journal article. If there was a shortage of buyers, who was influencing Merrill to keep producing these securities? Logic would dictate that it would be more short investors, although that is pure speculation.

To address Buffett's point about villains: This isn't the kind of disaster movie in which the hero walks away unscathed as an explosion rages behind him. Any CDO underwriting looks bad in retrospect. These products magnified subprime losses many times over by repackaging the exact same failing mortgages into different mortgage securities; as the Wall Street Journal wryly pointed out on Monday, it was a sloppy "cut and paste" job. Every time these securities were repackaged, ratings agencies mystifyingly slapped a triple-A rating on them, making them look as healthy as U.S. government bonds. "In one case, a $38 million subprime-mortgage bond created in June 2006 ended up in more than 30 debt pools and ultimately caused roughly $280 million in losses to investors by the time the bond's principal was wiped out in 2008," the Journal wrote. Another indicator of multiple sinners: ProPublica’s recent revelatory investigation of similar—though not identical—trades by hedge fund Magnetar.

The Taibbi-led hysteria surrounding Goldman Sachs last summer did have some usefulness; it spurred mainstream reporters to start poking around in Goldman's business and led to great, detailed stories from the experienced reporters at the New York Times and the Wall Street Journal. And Taibbi, lacking no chutzpah in his latest opus, makes it clear that hearing gossip about the Paulson trades was good enough for him to feel in the loop—never mind checking it out and putting that in print instead of a bunch of half-baked, completely incorrect conspiracy theories that ate up 10,000 words. Bygones, we guess. Taibbi is on a much better track now, by finally realizing how widespread this behavior was. But in labeling Goldman Sachs as the sole cause of four major bubbles last year, that Rolling Stone story—and its imitators—was dead wrong. As we said before, the real story is so, so much bigger than that.

BP's CEO Sounds a Lot Like Alan Greenspan

Chadwick Matlin — Tue, 04 May 2010 18:17:37 +0000

How To Hack Someone Else's Voice Mail, Probably Legally (For Now)

Mark Gimein — Mon, 03 May 2010 19:28:55 +0000

Recently I got an urgent message in my e-mail urging me to call my congressman about an upcoming piece of legislation tackling an urgent problem of contemporary society. No, not financial reform; no, not health care—caller-ID spoofing.

The message came from SpoofCard, a company that markets a calling card that will let your call appear with any caller ID number you choose. Programming in a special caller-ID is something that corporate phone systems have long been able to do—a call from a New York Times reporter is announced with a series of 1s, for example. Yet even in the age of phone number proliferation, we still tend to trust that caller ID. Maybe more than we used to: Our cell phones are ourselves.

The legislation at issue would restrict the use of caller ID services to send a misleading ID with the intent to deceive. You can see why folks are worried about this. Most other uses of SpoofCard—which also lets you (somewhat unconvincingly) change your voice—fall into the category of pranks. But there are some more serious, and potentially sinister, uses as well.

Think about it for a second and you can come up with them. Checking someone else's voice mail probably comes near the top of the list. Many voice-mail systems are set up not to require a password when you check your voice mail from your own phone. SpoofCard can come in pretty handy with those.

Here's a confession: I did once use SpoofCard to pose as someone else. I programmed it with my parents' phone number and called the cable company, in case they cross-checked the number registered to the account against the number I was using to call. It seemed like the only way to bypass voice-mail hell. It worked. I cancelled my parents' HBO service without a hitch. I feel like that's pardonable. If the folks at the cable company are reading this: My mother did want to cancel that. Really.

On balance, limiting caller-ID shenanigans is probably a good thing. It's also worth wondering, however, if the profusion of new laws targeting identity theft can't have some dangerous effects down the road. As the Digital Millenium Copyright Act has proven, creating new categories of criminality sometimes yields wacko results, like the arrest of folks who film a movie screen with their cell-phone cameras.

We already have laws against fraud or misrepresentation. That we need to expand them with special new laws targeting particular technologies is not entirely clear. The view of legislators seems to be that we do. So if you're dying to prank-call your high school nemesis, you should probably do it now, while it's still legal. Just don't go trying to check their voice mail. That's creepy. And probably already illegal anyway.

Warren Buffett Really Enjoys a Nice Cold Lemonade From Time to Time

Chadwick Matlin — Mon, 03 May 2010 18:04:13 +0000

There is no demographic more vulnerable to hero-worship than children. Athletes, politicians, and public servants find their most receptive audience among kids too young to find their flaws. But conspicuously absent among that class of role models are financiers. There are no posters of Lloyd Blankfein to hang on a wall, no lunch boxes with Adam Smith on the cover, and no Too Big To Fail trading cards to mythologize the lions of Wall Street. (I’ll trade you a Jamie Dimon for Vikram Pandit and Joe Cassano!)

Never one to let a market go untapped, Warren Buffett is stepping into the void. Over the weekend, the Oracle of Omaha started a new Web series, The Secret Millionaire’s Club.It’s animated; it’s hokey; it’s shamelessly capitalistic. It’s very Buffett.

The show’s theme song best summarizes the conceit.

I’m good friends with Warren Buffett. He’s going to teach me how to do my best. Learn to invest and have a lot of fun doin’ it. It’s the Secret Millionaires Club. The Secret Millionaire.

There are four members of said club: three kids—Asian Girl, White Guy, and Androgynous Indian—and their capitalist sherpa, Warren Buffett. They have a secret lair that is found only after pressing a button inside a statue of Benjamin Franklin and finding an economics book on the shelf of a library. Inside, the lair looks like what would happen if Wall Street analysts tried to design their own Batcave. The club’s goal is simple and exactly what I always wanted to do after school: Rescue business models desperately in need of help.

Every Secret Millionaire’s Club webisode has distinct parts: the problem, the capitalism, and the Buffett. The first episode went something like this:

The problem: Asian Girl has a friend who doesn’t have enough money to go on a class trip. So rather than wait for a government handout (or parental bailout), the friend has started her own small business like a proud American. Her industry is lemonade, but her business is bad. Nobody is showing up. This, according to Asian Girl, is a “serious financial emergency.”

The capitalism: While the club is trying to figure out what’s wrong with the stand, they run through the necessities of a good business model: quality, no competition, a reasonable price. Buffett, ever the avuncular presence, prods them to recognize the one thing the friend’s lemonade stand doesn’t have: location.

Buffett’s nugget of wisdom: “If the people won’t come to your business, bring your business to the people.”

Buffett personal detail: The Oracle “really enjoys a nice cold lemonade from time to time.”

Should We Be Restarting the Consumer Debt Machine?

Heidi N. Moore — Fri, 30 Apr 2010 14:59:54 +0000

At the Milken Institute Global Conference this week, the biggest story was not about derivatives or social media. It was this: Even though America is one of the world's richest countries, the American consumer has spent more than a decade living outside his means. As panelists discussing the problem of the "Frugal Consumer" pointed out, Americans hold debt equal to about 130 percent of their income. The average American household spends only about 14 percent of its income actually paying off any part of that debt. With a 17 percent real unemployment rate, household incomes are naturally continuing to fall; PIMCO chief Mohammed El-Erian warned that unemployment is now a "structural" problem, an eroding pillar of our economy. Real-estate magnate Richard LeFrak noted that so many homeowners are now underwater on their mortgages—owing more than the houses are worth—that they feel poor, and said that consumers won't spend as long as they feel poor.

Unfortunately, there are few ways to see real growth in our economy unless the borrowing resumes. Businesses need the income; Wall Street needs the deposits and car loans and mortgages to keep generating fees. The warnings were universal: "We have not done business well as a country for a long time in terms of building sustainable prosperity," Obama manufacturing czar Ron Bloom said at the conference on Tuesday.

The solution to the problem was elusive, even among all the bright minds at the conference. The problem with the consumer is mostly psychological—and maybe pathological—when it comes to navigating the world of debt, and it was hard for many to figure out what the driver of consumer spending would be. Martin Franklin, the CEO of Jarden, theorized that innovation—new products, better services—would loosen purse strings. But the larger issue—American dependence on debt—went heavily acknowledged but thoroughly unsolved.

The diagnosis was clear, even if the cure wasn't. Communispace CEO Diane Hessan commented on the "conscious recklessness" of the American consumer that shifted personal responsibility for spending. " 'Most people say, 'The reason we had a recession is everybody else. They overspent. I didn't overspend.' The circle of trust has narrowed down to the immediate family. This anger has come from a generation of Americans that feels entitled. If you feel that it's someone else's fault, you feel angry instead of addressing what happened and doing things differently."

Barry Sternlicht, the founder of Starwood Hotels and Resorts, similarly attributed the problem to a national childlike, fairy-tale mentality. "We're optimists, we have no memory as Americans, and while Congress is fighting about everything known to man, we are the mad drunk at the teller borrowing as much as we can from people who don't care if we prosper," Sternlicht said.

Sternlicht compared the American people's addiction to borrowing to baseball player Mark McGwire's use of steroids: "We're pumped up. We've got a trillion dollars of s**t going through our bodies. It feels pretty good, but it can't last." A slide at the "Frugal New Consumer" panel showed that the United States houses only 4 percent of the world's population but did the most spending, to the tune of $10 trillion. China and India, who have twice the population, created consumption of only $2.5 trilllion—combined.

While Sternlicht favored steroids as the metaphor, the better one might be heroin, if only because the solution seems to be something like methadone: more borrowing.

Steve Forbes, for instance, lamented the passing of the credit-card reform bill in Washington because it would hurt startups and small business—no small issue, since 60 percent of the decline in job creation is in the small-business sector. And here's the problem: three in four startups are funded with credit cards. Fewer startups mean fewer investment opportunities for next-stage investors. "Venture capital is going to get crushed as a byproduct here," Forbes warned.

Indeed, the continued refusal of banks to lend money into the system is a source of frustration. "The financial sector should be a servant of Main Street," said Ron Bloom. A slide at one panel showed that bank lending fell 7.5 percent in 2009, if you track it from the first quarter of 2008. Marc Lasry, the founder of Avenue Capital (best known as Chelsea Clinton's former boss) noted that lending should actually have increased to trillions of dollars.

But even if it had, all that lending would have done is contribute to this scary new phase of American consumerism: covering living expenses through credit-card debt. While many of the CEOs on the "frugal consumer" panel talked about how to get consumers to buy their products, they were also wary of the effect and resigned to a long recovery. Stephen Roach, chairman of Morgan Stanley Asia, wasn't optimistic. "I think we're in the third inning," he said. "We have a long way to go to give the overindebted, overextended American consumer a green light."

That didn't prevent moderator Jim D'Aquila, an investment banker in the consumer products group of Imperial Capital, giving a wry exhortation to the attendees after the frugal consumer panel: "Go to a gift shop or a store nearby and buy something."

Presented By:

Fri, 30 Apr 2010 14:59:54 +0000

Goldman's Role in Palm's Meteoric Launch

Mark Gimein — Thu, 29 Apr 2010 15:45:51 +0000

This week Hewlett Packard (HPQ) agreed to buy Palm for $1.4 billion, marking the end of the independent existence of one of the highest flyers of the dotcom era. Not exactly a dotcom, Palm (PALM) was one of the great wacko dotcom blockbusters. In its initial public offering just over 10 years ago, Palm opened for trading at $165 a share, 334 percent higher than the $38 price that IPO insiders paid for the shares.

Palm, it's worth noting—oh boy, how worth noting—in the current environment was a Goldman Sachs (GS) deal. Then, as now, Goldman was the most prestigious investment bank and underwrote many of the hottest IPOs. Investment banks took a justified beating for the dotcom deals; virtually every one of the companies with those skyrocketing opening prices turned out to be a disaster for investors.

To this day, however, it seems to me that the crazy gyrations of those dotcom stocks have never been adequately explained. Palm is a perfect case in point. Notably, Palm did not go down from the sky-high $165 price over a series of months. It went down dramatically the first day, closing at $95. Those who got the shares for $38 did very well. But if you bought the shares in the morning for $165, you got killed by the afternoon.

The conventional explanation for this is that investment banks priced their IPOs low in the hope of funnelling money to favored investors and creating publicity that would lead to future, bigger stock offerings (and more fees). I've always wondered if this explanation was sufficient. The gains to institutional investors who got in at the IPO price were vastly bigger than the fees investment banks got on these deals.

On Palm, for instance, if Goldman and other underwriters got the standard 6 percent fee, the total for the IPO would have come out to about $60 million. A lot of money, but only a small fraction of the $1.5 billion that the investors lucky enough to get shares at $38 would have gained at the day's closing price.

The operations of investment banks' trading desks are a black box: What the traders are doing at any moment is a closely guarded secret, and even folks in other parts of the banking business aren't privy to their strategies. What the banks' trading desks were doing in those frantic early hours of the dotcom IPOs is something that, to this day, no one has looked at closely.

Did the banks make substantial gains on their IPO market making? Really, we still don't know. Palm is an especially interesting case in point here. The investment bank that underwrites a public offering is responsible for making a market in the stock. The underwriters of an IPO are also the only ones allowed to short the stock in its first three days of trading.

Don't jump to conclusions too fast. These days, the word “short” alone seems dangerous. There are good, though complicated, reasons for an underwriter to short a IPO—it lets the bank (legitimately) stabilize the price by buying it back later. The very first share sold at the opening of an IPO is a share sold short by the lead underwriter or “bookrunner.”

Still, the frenetic trading in a stock like Palm has always raised questions for me. Trading desks stand to make—and sometimes lose—money from big price swings, and a fall from $165 to $95 in one days certainly counts as “big.” Did investment banks manage to take back in trading a meaningful part of the money they essentially gave away to institutional investors in those dotcom IPOs? Yes, in stock market terms this is a question about ancient history. But with the investment banks, and especially Goldman, yet again called to explain what they do to the public, it's ancient history that could still shed light on the present.

Why Washington and Wall Street Can't Just Get Along

Heidi N. Moore — Tue, 27 Apr 2010 14:49:22 +0000

There’s barely an industry out there—from energy to health care to finance—that would be thriving today if not for government intervention. Yet it's rare to find a capitalist who's willing to say he or she is grateful for it.

At the Milken Institute Global Conference this week, it’s been clear that, nearly two years after the financial bailouts started, the gulf of understanding between the power brokers in New York and those in D.C. has grown deeper, angrier, and more frustrated. For a long time, power in the United States has resided with the people in charge of the money, and that incumbency is hard to give up. Rather than getting closer to consensus, the financiers and the policy people are further away from each other than ever. The only question is a big one: Are Wall Street's objections to government intervention the death rattle of a dying industry? Or are the moneymen, steeped in the ways of finance, actually the knowledgeable Cassandras?

As Ted Turner responded when Michael Milken asked him about government intervention: "That's heavy stuff."

And it’s not always clear where alliances stand. Ron Bloom, the senior adviser to the Treasury Department who is running the bailout of GM and Chrysler, is a former labor activist who also holds a Harvard MBA and worked as an investment banker. On Monday, Bloom defended the no-strings-attached infusion of money into the two auto firms, objecting that imposing proscriptions on the massively failed companies, now wards of the state, would be "more interventionist."

The idea that pouring billions of dollars into a company would be less interventionist than the government getting involved to guarantee the health of that investment ... well, that's the awkward dance that policymakers are walking. They don't want to openly admit to being interventionist, but neither can they afford to be accused of not doing anything. On the other side, banks and automakers have been happy to take the government's money; they just don't want the government's ideas. Both sides can align their interests easily: The government can pour money into companies, but involvement should really stop there. Ken Griffin, the founder of Citadel, complained that, "The American public is fed up with the expansion of government into our lives. … The American people want an opportunity, not a handout."

Of course, that's a hard case to make when real unemployment stands at something like 17 percent, and unemployment benefits are running out as people spend more and more time out of the workforce. Those people angry at both the government and Wall Street, who spend much of their time throwing barbs at each other.

The government retains the strong argument that the capitalists had their chance and screwed it up—or, as Mohammed El-Erian, the CEO of powerful bond manager PIMCO put it, "What's driving policy is the widespread impression that markets failed." El-Erian captured the thrust of public frustration with Wall Street when he said, "No society can accept a system that privatizes massive gains and socializes massive losses." Translation: We can't let the rich make all the money, while everyone else pays all the taxes when the rich fail at speculation.

It’s hard to feel the audience agreed: Those with money still feel severely unheard, and it has created some amusing bedfellows. Consider, for insistence, billionaire T. Boone Pickens expressing so much frustration with the administration's energy policy that he advocated grassroots reform. Pickens railed against government policy in Iraq and Afghanistan, where he believed we had waged wars purely to protect petroleum assets. "The money paid for oil in the Mideast will go to fund the Taliban," Pickens said. Ted Turner called repeatedly for a reform in energy policy to "leave coal in the ground" and move to "the greatest business opportunity of the 21^st century"—clean energy such as solar and wind. ("I invested in wind," Pickens, who authored his own Pickens Plan on energy, quipped ruefully. "I kinda wish I had my money back.")

Carly Fiorina, the former chief executive of Hewlett-Packard (HPQ) and sometime politician, called the stimulus "inefficient," suggesting that it had gone mostly to protecting old-line construction jobs when it should have fueled startups and innovation. Ken Griffin, the founder of giant hedge fund Citadel, appeared contemptuous of current administration financial policies, "There seems to be no recognition. … If we push current issues down the road five to 10 years, we will be Greece." Griffin also objected to the fact that investment banks including Goldman Sachs (GS) and Morgan Stanley (MS)—which he did not name, but obliquely referred to—are now classified as real banks. "We should not have an FDIC guarantee to do proprietary risk-taking rather than deposits and lending," Griffin said. (Of course, you would expect that; when Goldman and Morgan engage in their own trading, they are competitors to Citadel—but unlike Citadel, if they fail, they will have government support.)

The truth is, neither Washington nor Wall Street can get its bearings right now. El-Erian told a fable, of sorts, about the state of "maximum confusion" when an old technology is inadequate and a new one is looming. "At that point, I don't pick up the phone and say, 'I want to learn the new technology,'" El-Erian said of the confused protagonists, meant to be Wall Street. "I say, 'bring the old one back.'" And that is the nut of the problem: Faced with new ways of moving money, and new ways of governing, both the Street and Washington want the old ways back.

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Goldman's Role in Palm's Meteoric Launch

Why Washington and Wall Street Can't Just Get Along