17th September 2009

Airlines Don’t Have To Suck

Sometimes when I get on my usual rant about why certain airlines suck, my friends getting sick of it seem to take the attitude “of course they suck, there is nothing they can do about it”.

But as Mike points out in a post about Virgin America (and I’ve had similar experiences with other airlines), you CAN do better. And you can even do better while having your staff feel good about their jobs. You just have to care about making the overall experience and system work and not just about fleecing “business” fliers into paying $2000 for domestic flights.

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24th June 2009

iPhone Apps, Updates and Bait & Switch

It will be interesting to see how things work out with the new in-app purchases and all. I think there is a certain amount of fear that the whole app market is going to turn into a bunch of semi-scams where every app author tries to constantly squeeze more money out of people. Part of the biggest danger is that app updates which I tend to just do automatically can regress functionality.

One of my favorite casual iPhone games is FlightControl. I think it cost $0.99 and its simple, easy to pick up for a few minutes while waiting for a bus or something. I noticed a week or two ago that there was multiple levels in the game- you could switch the map and try out other environments. Now that appears to be gone- probably something that looked like a routine update removed it and I fear its going to be back later as an extra charge…

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19th June 2009

iPhone 3GS Activation

I got a new iPhone 3GS today (actually Kat got it, but is letting me have the new one while she gets my old one that isn’t eligable for an upgrade yet). They were warning that the activation is taking forever but after we were home and an hour later it still wasn’t activated.

The LA Times blog had some advice to turn the phone off and back on. I gave it a try and 2 minutes later it activated right away.

I’ve got to say, this year’s iPhone release madness was much better than the past. The lame upgrade policies (even the recently ammended ones) suck- I do expect that for my $1000 a year in service + $299 a year I should be able to get a new phone every year. But the reservation process was great and even at 3:30pm I was able to walk into the store, after a 2 minute wait someone took me in, they grabbed the box and it was all very smooth. I’m especially impressed that even on the most busy day of the year they still had things worked out enough that someone was able to notice us puzzling over the display of protective cases, approach us and helpfully suggest a few models, unbox them for us to try out and all. The Apple Store continues to the the retail gold-standard.

posted in Apple, Business, iPhone, Technology | 0 Comments

30th April 2009


Did you catch the latest twist on the markets?

Normally when a company like Chrysler is about to go bankrupt the bond holders are really eager to avoid the situation. They are willing to cut a deal and accept $.70 on the dollar or something to avoid pushing the company over the edge and making a big mess where they are only going to get $.40 or $.50 on the dollar and only after a year or so of expensive legal waste. Now the catch is, to avoid bankruptcy you need pretty much all of the bond holders to agree.

But what happens when those bond holders are a hedge fund that has credit default swaps on the bonds? If the company goes bankrupt the default provision kicks in and they get back $1 on the dollar. If a deal is cut they get less. So you can have a tiny minority of bondholders push the company over the edge at huge cost to everyone else because they get a bit more.

Even more wacky- What if the hedge fund only has $10M in the bonds, but they have $100M in credit default swaps? Remember, people start buying them as speculation, not just a hedge on their bond investments. So now their little $10M stake can actually be leveraged into a $90M profit while everyone else goes to hell. This is another classic example of how some of these complex instruments broke what used to be thought of as a well functioning market where everyone has appropriately aligned interests (investors in a company want it to do well, all the right cycles are reinforced in the right ways).


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2nd April 2009

Free Market Outrage

I think part of the thing that is so weird about the big financial scandals this past year (other than that most are a complete replay of LTCM and other things from 10 years ago) are the sticky place that it puts someone like me who typically is a fan of “free market” mechanisms. John posted a link and an excerpt of a rant that I think expresses some frustration about just how off-the-rails those “free market” mechanisms seem to have gone.

Which brings me to some thoughts about the whole role of the financial services industry. The financial services industry doesn’t actually make anything. That doesn’t imply that its bad or that the people who work in it are bad- there are lots of industries that don’t make anything and yet are critical to the functioning of our society. Lawyers don’t make anything, they help us make sure we have good agreements about how things get made. Politicians don’t make anything, they create the rules that hopefully give us a level playing field for our society. Cops don’t make anything- they enforce the rule of law so that people don’t rip each other off or hurt each other. Each of these has a key role in the functioning of the overall society (and in making it possible for the other industries to function). But each of these can also have its own power-grab. If we were in a society where the politicians were just lining their own pockets with $10 million dollar bonuses and payouts and bribes or where the cops were doing the same thing I think we would scream bloody murder (and in fact we have when its been other countries where that happens). Each of these roles is expected to do its part and take an appropriate cut of societies resources for its role.

So what role does the financial services industry play? I can think of three key broad functions (and I’m sure I’m missing others)-
1) It provides capital so that people that want to accomplish things whether creating companies, goods, or buying houses, can do so without inefficiently having to have all their own cash up front.
2) It provides a stability and savings function. The combination of insurance and retirement savings and various off-shoots gives you a way to not just have to stuff cash in your mattress and live in fear that someone is going to steal it.
3) It provides a pricing function that comes up with appropriate prices for capital, commodities, and other financial instruments.

To provide these functions the people involved in this industry are necessarily working with lots of money. But that doesn’t imply that they are inherently owed 1% of whatever money passes through their hands. It doesn’t imply that society should let too much of our effort (both money and human capital) go into serving that function, ESPECIALLY if by doing so it erodes some of the fundamental things that the financial industry provides (stability, efficient market pricing, both of which have gone to hell because the compensation system on Wall Street encouraged short-term risk taking).

Let me give you an example that feels like it highlights this. The New York Times is reporting that the Fairfield Greenwich Group, one of the “feeder funds” that was investing in Madoff was paid 1 & 20% commissions on the money they invested for their clients in Madoff. To be fair, that is a fairly normal commission, although part of the presumption would be that the people earning that have done some serious due diligence into understanding how the money is being invested. So lets say you gave them $1000. After 3 years, they give you the great news that because Madoff is so smart your $1000 is now $2000. Oh, except that they kept 1% of assets under management each year (call it $45) and 20% of the profit ($200), so you only have $1755. Still, not to bad to make 75% gain in just 3 years.

Except that the underlying Madoff thing was all a fraud. But Fairfield still pocketed your $245. They took 25% of your money as a service fee to throw away the rest of it. To really understand how perverse this whole thing is, imagine Madoff did “even better”. He turned your $1000 into $5000. 400% profit! Meanwhile Fairfield pockets ~$90 for their 1% and $800 for their 20% of the profit. The “better” the fraud does, the more all the financial industry guys line their pockets.

Ever wonder why the banks don’t want to sell their toxic assets at real market prices (IE- what someone is willing to pay for them)? Why they were so eager to ditch the mark-to-market rules? The markets were up 4% today at one point on the relaxing of those rules. Basically that rule just lets them all keep playing the Madoff game and participate in the fantasy that the assets they hold have a higher value than they really do.

Which brings me full circle to the usual point I make in all these “financial crisis” posts lately. The only real solution, the only structural fix that would really work without imposing a web of complex “rules” that won’t adapt nearly as fast as the people trying to get around them, is total visibility for all transactions. Again, this will piss off a bunch of the underlying folks in the industry, but the Madoff thing wouldn’t have been able to happen. Various people will complain that it will be harder to make their huge profits using proprietary (and I’m sure very smart) techniques, but the balance has to not be in favor of protecting the ability for folks to make a profit in an industry that is fundamentally a “tax” that we all pay for the functioning of society. Full visibility will accomplish the real societal goals of why we need a financial industry better than the existing slick trading systems do, it will do so at lower cost to society, and it does it without having to over-regulate the details of what transactions are allowed and which ones aren’t.

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21st March 2009

Unintended Consequences

As expected, spurred to quick action by the wave of outrage, the government has begun to counter the A.I.G. bonus situation with what are probably some really bad reactions. 538 has a great write-up of some of the unintended consequences of the bill the House passed the other day. I do think something should be done about the A.I.G. bonuses, again, because I think that while $165 million is just a drop in the ocean of the multi-trillion dollar crisis, I do think this goes to the fundamental credibility of whether the industry is set up to work in our societies best interest in fixing the mess they created, as opposed to continued short-term cashing out while the getting is still good.

Although its obviously coming with its own set of political grandstanding, the approach taken by the NY Attorney General, Andrew Cuomo seems more reasonable. Rather than pass a law that has lots of side effects, we likely have plenty of existing laws that make a situation like this- executives signing contracts with each other that set up guaranteed payments, irrespective of job performance and from an (effectively) insolvent organization. I would hope that this would be sufficient to get the involved parties at A.I.G. to realize that its in their own self-interest to give the bonuses back, as well as make sure that similar situations will not happen again in the near future.

Meanwhile the one thing that I’d love to see more of is scrutiny of the actual work that this group has been doing unraveling their toxic deals. Have they been using the government money to cut good deals in the interest of A.I.G. and its shareholders (the US taxpayer), or have they been doing their own sweetheart hand-outs to the other Wall St. companies like Goldman. Are they just paying out these insurance policies at 100% despite the underlying bonds still being in fine shape, or are they striking an appropriate hard bargain so that no one walks away unduly profiting from the governments assistance?

Goldman is still claiming they have no exposure to A.I.G. but if that is true, among all the other government largess to Goldman why do they have more than $12 billion in payments from A.I.G. and other unwinding of these contracts?

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19th March 2009

Prioritizing our Outrage (A.I.G and Jon Stewart)

There have been several reasonable articles pointing out that our anger about the A.I.G. bonuses, while probably justified, is probably not the best thing to be spending our attention on now. The A.I.G. bonus thing represents a mere $165 million amid trillion dollar outrages. As Planet Money (one of my favorite news sources lately) points out, shouldn’t the President and Treasury officials be focused on the bigger issues?

Besides others point out, these contracts, while probably inappropriate are contracts, and isn’t preserving the soundness of contracts more important than lashing out against these people?

Before I get to my main point, I’d like to go over a few pieces of this situation-

  • It seems like these contracts were created in the time right during the collapse of A.I.G. before the government really stepped in. One can assume that the people inside knew by that point that something was horribly wrong and that it was likely the government was going to step in to help. From what we know right now (including that the current CEO says that he had no wiggle room to adjust the results) the contracts seem unduly beneficial towards the employees. Fred Wilson wrote a bit about bonuses yesterday and it just seems unheard of to be creating contractual bonuses that don’t seem in any way related to actual performance, are short-term focused (in industries I’ve worked, retention compensation gets paid out over a period of you staying for 5 years), etc. The problem is due to the amazing lack of transparency, we don’t know the details of these contracts yet or how they got created or who they were given to or how those people performed, but presumably that is what Cuomo is trying to find out. But it seems suspiciously like a bunch of guys, all with one foot out the door gave each other binding sweetheart deals in the moment before the government stepped in.
  • I think it IS totally appropriate to shift some of the attention to how well these guys have performed rather than their personal payouts. The fact that they have been spending the bailout money to resolve the companies obligations with their trading partners is not a problem- in theory, that is what the bailout has been for. But the reports are (again, with little real data, amazing lack of transparency given the situation, etc, etc), they have been cutting the worst possible deals and basically just handing over huge sums of cash to the other folks in the industry. Many of these positions were insurance on various bond offerings, where if the bond offering failed, A.I.G. would cover the losses. But what I’ve read is that A.I.G. is paying out cash at 100% on the $ for these even in cases where the underlying bond is still fine. The analogy someone said was you buying fire insurance, and then the insurance company paying you off 100% even though the house didn’t burn down.
  • The above together look like a bunch of guys who are not working in the interest of the company that pays them, or the shareholders (the tax payers) but rather cut themselves a sweet deal and are now handing out wads of cash to the very folks that are likely to be offering these individuals their next jobs.

The $165 million in bonuses itself isn’t such a big deal, but for the recovery of the financial system to work, the people of the United States have to feel like we can actually trust the people fixing stuff to work on actually fixing it, not starting more fires.

Which leads to the biggest point and back to Jon Stewart vs. Cramer. I feel increasingly like a good chunk of the current world financial system is just a big scam. If you want to look at the “big picture”, ignore Madoff and his Ponzi scheme, and consider that it looks like a big chunk of the financial industry is fundamentally corrupt and using their ability to hide what really goes on to collectively scam the whole of society. Let me stop for a second to point out that there are tons of people in the financial industry that are hard working competent people who are just doing what they can to provide access to capital, create markets with fair price discovery, and provide safe places for people to invest their savings. But the Stewart / Cramer confrontation just highlights the overall big picture that just about all the big firms (Lehman, Goldman, Citi, A.I.G), and a big chunk of the financial media were all participating in this system that wasn’t about a well functioning market but was rather about coming up with some scheme to make .5% return on some obtuse derivative and then leverage it 60-1 into real money, and meanwhile go hype up some rumor on some stock (Cramer tries to blame the shorts, but there is just as much or more artificial boosting stocks for people who are long).

And all of this was fueled by two key elements- a system that was fundamentally non-transparent, and short term compensation. The industry worshiped the notion that a good hedge fund (or private trading desk at a big bank) would come up with some proprietary system and would then do their trades with tons of different counter-parties so that no one could catch on to the system. But this also meant that there was no way for people to judge risk, no way to judge market saturation to the point of illiquidity (assuming that the “system” didn’t rely on creating illiquidity in the first place to in effect corner the market on some obscure derivative which often backfired for example in the cast of LTCM).

And that brings us back to the $165 million in A.I.G. bonuses. $165 million is nothing compared to the $10+ trillion Ponzi scheme that we fear we are all wrapped up in. But the reason that it IS important is that it does represent that the heart of what has gone wrong all along is still happening- short term windfall compensation and financial dealings that are not looking out for the interests of the right parties. It represents the erosion of fundamental trust in the system. It represents the fear that we won’t be able to fix things without a major overhaul, that the core DNA of Wall Street, and many of the people that work there are fundamentally out of touch with what we need to maintain a stable, functional financial system that actually meets the needs of society.

As one last point, I’ll say that I am concerned that the reaction of government in trying to fix this is going to be the wrong one. There is too much of a temptation to just create a bunch of regulation saying that you can’t do this, you can’t do that, and those kind of regulations will never keep up with the market and will strangle legitimate dealings. Back in September I suggested radical transparency for the financial industry and the more this crisis has progressed, the more convinced I get that it would really represent the best solution (hey, even Wired jumped on my bandwagon). If the deepest current problem is a trust issue, this kind of switch to full transparency becomes the only cure. The financial firms that rely on some proprietary trading scheme aren’t going to like it, but those don’t actually add to society- they just leach off it with very real and painful external costs (bailouts when they fail).

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17th March 2009

AIG Redefines “Retention”

From today’s NYTimes-
“A.I.G. made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing a taxpayer bailout,” Mr. Cuomo wrote in the letter. “Something is deeply wrong with this outcome.”

Mr. Cuomo did not name the bonus recipients, but the numbers are eye-popping, given A.I.G.’s fragile state. The highest bonus was $6.4 million, and six other employees received more than $4 million, according to Mr. Cuomo. Fifteen other people received bonuses of more than $2 million, and 51 people received bonuses of $1 million to $2 million, Mr. Cuomo said. Eleven of those who received “retention” bonuses of $1 million or more are no longer working at A.I.G., including one who received $4.6 million, he said.

Nice! $4.6M to NOT stay.

Although frankly those guys appear to suck so much that maybe paying to get rid of them IS the right thing.

On the other hand, the latest story is the reason they need to “retain” them is that otherwise they will go out into the market and use their insider knowledge to trade against the A.I.G. positions and get rich that way. If that is true, it sounds like insider trading, fraud, or some other type of crime, but it doesn’t mean its not what is happening even as we uncover this stuff.

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15th March 2009

In Stewart We Trust + A.I.G.

I’m sure everyone has seen all the attention about the great Stewart vs. Cramer showdown on the Daily Show this week. The most amazing thing to me is how wacky the press coverage has been, especially the people who should know better. The thing is, what Stewart is attacking is not just CNBC and the charlatans on the so-called cable “news” networks, but also the broader media itself that hasn’t had the guts to say or do anything about it.

The New York Times TV critic posts a snarky thing about the show that totally missed the point. Its not a boxing match, its not about two dueling personalities. Even the revelation during the show of the video clips of Cramer pretty much straight-out admitting to criminal market manipulation and encouraging others to do the same is not the most important bit (although it was also missing from most of the coverage). Its about the nature of media itself. Where has the NY Times been all along? I didn’t get a chance to listen to the whole “On the Media” radio show this week, but the web-site doesn’t give any indication that they paid any attention either.

The even deeper point is the extent to which the media has been falling down on their jobs of actually calling people on BS and lies. The “present both sides of the story” by printing quotes from a couple of people but in general have been amazingly lax about bothering to investigate, dig up any real facts, or make it clear when the quote from that CEO is just a lie.

A great example is today’s New York Times article about the outrageous bonuses that prints the quote from the A.I.G. CEO Liddy “We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”

That quote is presented unchallenged in the New York Times, but let me just pick at it for a second. To quote one of my favorite Saturday Night Live bits lately, Really? REALLLY?!? These are the “best and the brightest”? Really?!?!? These are exactly the same guys that just incurred > $200 BILLION in losses directly for your company (we still don’t know the full extent because these guys are still hiding it in their accounting), these are the guys that already incurred a $170 BILLION tax-payer bailout directly, these are the guys that precipitated the worst crisis in decades, costing the US taxpayers over $1 TRILLION so far, costing the economy many times that. These are your “best and brightest”? These guys should be indicted for fraud and/or reckless negligence.

Beyond my indignation, the reporter could have done some basic fact checking. Are $3 million bonuses really necessary to retain Wall Street guys in the current economy right now? If these guys were fired, would anyone even hire them? (“lets see, on your resume, it says you worked for A.I.G. Let me call your references… You say you lost $100 billion in your last position?”) Frankly, from folks I know in the financial industry, most that still have jobs are just pretty happy to have them. And I’ve heard the quality of the resumes that show up at any company that is hiring at all are through the roof. Trust me, if these guys are the sort that are just out for a quick buck and will quit if they don’t get their big payday right now, A.I.G. and their shareholders, the US taxpayer (80% ownership) are much better off without them.

Everyone is also taking at face value the notion that these guys have contracts that require the payments. I’m pretty confident that their contracts have clauses that if they are fired “for cause”, they aren’t owed bonuses. If the contracts don’t have that clause that would be pretty direct evidence that the contracts themselves were part of a fraudulent scheme to lock in a payday in anticipation of a government bailout, which again would void the contract. And let me just say that I’m pretty confident that losing $200+ billion would count as a valid reason to get fired. I can just picture these guys trying to contest it as a improper termination in front of a jury (watch last week’s Law and Order if you want an example of what that looks like).

The bottom line is that the mainstream press, all of them, just doesn’t dig in on this stuff anymore and they accept the truthiness as a normal form of communication. We find ourselves in this strange position where Jon Stewart, the guy with the talk show on Comedy Central appears to be the only one we can rely on anymore.

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4th March 2009

Kindle for iPhone

Various blogs are all in an uproar over the Kindle iPhone app and whether this is a good idea or not. I’m going to come down on the “very good idea” side and say that this makes me more likely to get a Kindle (and more importantly invest in the Kindle eco-system by buying some content).

The big issue for me is the profusion of devices. I don’t want to carry around a phone, a music player, a book reader and a laptop. One of the things I really like about my iPhone is that it acts as a good music player so I can just carry one device.

Having said that the form factor of a given device isn’t perfect for every situation. I downloaded the Kindle app to my phone and tried it out and it was very well done (I got the sample first chapter of the new Neil Stephenson book), but it seemed like it would be a painful way to read a whole book. The key thing is that the iPhone app and device both sync the same books and can share the place you left off reading + bookmarks. So if I were to buy a Kindle device I’d end up of course getting content for it, but if I left it behind I could still do a little light reading from anywhere which is a really cool scenario.

The other angle behind giving away the software of course is that Amazon is presumably more motivated by getting people to invest in their content than in selling the actual devices. Apple has done an amazing job getting their device COGS down so that they make a profit off $199 iPhones, but Amazon is much newer to the hardware space and were at least implying that they can’t sell for much more than the $359 without losing money. But it doesn’t take that many $10 digital books to turn into real money and if their free iPhone app gets you to spend a bunch of money and locks you into your Amazon digital library, they win too. From that perspective it would make sense for them to make a PC version too- if I could read real books on a normal Windows tablet that would probably push me over the edge for sure.

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