Risky Business 3: And Then There Were None

In our last post, dated Monday, September 15, we reported that of the 5 major investment banks -- Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, Morgan Guaranty -- only two, Goldman Sachs and Morgan Guaranty remained operating independently. All others had either gone bankrupt or bailed out and absorbed by large commercial banks.

On Sunday night, September 21, the Federal Reserve allowed Morgan Guaranty and Goldman Sachs to change their status from independent investment banks to commercial bank holding companies. In exchange for this status Morgan Guaranty and Goldman Sachs lost their independent status and must submit to Federal Reserve oversight and regulation. What these two former Investment Banks gained was direct access to the Federal Reserve Discount Window and to loans giving them immediate credit. What this means to the economy remains to be seen. What this means to these giant investment firms is reorganization of their structures and submitting to oversight and government audits.

Hence our title for this post "And Then There Were None" cribbed from the Agatha Christie novel of the same name.

In that last post we also reported on the possible failure of Insurance giant AIG. On Tuesday the Federal Reserve bailed out AIG to the tune of 85 bilion dollars. AIG at that point was taken over and policies protected for the time being. Numerous small businesses and state pension funds were invested in AIG as well as home mortgages. It is the mortgage crisis, known as the subprime mortgage crisis that has precipitated the current crisis.

Then at the end of last week, former Goldman Sachs CEO, Secretary of Treasury Henry Paulson, submitted a 700 billion plan, backed by President Bush, to bailout the financial sector of the United States economy! The bailout would allow the Department of the Treasury to purchase all the bad housing debt, mortgage backed securities, that commercial and investment banks hold, take this debt off their balance sheets, and allow them to continue investing and trading. Congress is currently debating this proposal with a self imposed deadline of Friday, September 26, for voting on and passing legislation. Executive pay is at issue as is what stake or benefit, if any, the government would earn from bailing out Wall Street firms and banks who request the assist of this bailout. How taxpayers would benefit from these large infusions of money propping up credit risks.

Is there a reason to panic? Businesses, large and small, depend on credit (loans) to start and continue their businesses, often putting up their properties (homes, etc) as collatoral. Farmers do the same. As Banks limit their lending because of squeezes on their own capital, credit becomes less available to small businesses. So the housing mortgage crisis affects all -- individuals, businesses, local and state governments. As companies and invidividuals fail, fewer taxes are collected by states, forcing budget cutbacks, layoffs, and elimination of programs.

Will the bailout stabilize the economy? Or will it simply bailout Wall Street, if that. That what's being debated right now. Inc Magazine looks at the effects on small business in an article by Patrick Sauer, "Wall Street vs Main Street". Is it sending good money after bad as economic columnist of the New York Times, Paul Krugman, suggests in his September 21 article, "Cash For Trash", The Times also polled the impressions of three economists, one from Duke University, another from the Brookings Institute, the third from the American Enterprise Institute, for their September 22 article, "How Three Economists View a Financial Rescue Plan".

Meanwhile, stock markets are volatile as ever, one day up with great gains, another day down with great losses. So economic balance does not appear on the horizon as yet.

Looking for a book on subprimes. Robert J. Shiller, author of Irrational Exuberance, has just published The Subprime Solution: How Today's Global Financial Crisis Happened and What To Do About It available in public libraries. On the previous bailout of Savings and Loans in the 1980s, see Michael A. Robinson's Overdrawn: The Bailout of American Savings, and Bailout: An Insider's Account of Bank Failures and Rescues, also available at public libraries.

The future? To be continued!

Risky Business 2 ( In the News )

With the bankruptcy of Investment Bank giant Lehman Brothers, the sale of Merril Lynch to Bank of America, the potential failure of Insurance giant, American International Group -- AIG, and the 504 point drop of the Dow Jones Industrial Average, Monday, September 15, 2008 will long be remembered. Is it equal to the Great Crash of 1929?

How to find perspective on the current economic crisis? Are there sources of information that might help us understand what we are going through?

Over the past few years several books have appeared that attempt to put the current economic situation in context. The following list is by no means inclusive and is limited to what is currently on library shelves. Let's begin with some books on the Great Depression:

The Great Crash 1929 by John Kenneth Galbraith is a recognized classic on reasons behind the crash of 1929. Hard Times: An Oral History of the Great Depression by Studs Terkel represents in depth memories of many people who went through the Depression and recounts their stories. Terkel talks to people from all strata of the period. An important book. T.H. Watkins has chronicled the Great Depression in 2 books -- The Great Depression -- America in the 1930s and The Hungry Years: A Narrative History of the Great Depression in America. Like Terkel Watkins draws on oral histories and memoirs, but also historical documents. Other books about the Depression include Rainbow's End: The Crash of 1929 by Maury Klein and The Forgotten Man: A New History of the Great Depression by Amity Shlaes. Shlaes sees the small businessman as the Forgotten Man and believes that New Deal interventionist programs prolonged the depression instead of relieving its impact.

For the current situation there are several books including: When Markets Collide: Investment Strategies for the Age of Global Economic Change by Mohammed A. El-Erian providing an action plan for investors, risk managers, and policy makers; 2 books by Robert J. Shiller -- The New Financial Order: Risk in the 21st Century and Irrational Exuberance; New York Times economics columnist, Paul Krugman's The Great Unraveling: Losing Our Way in the New Century, former Federal Reserve Chairman Alan Greenspan's The Age of Turbulence: Adventures in a New World; Eric S. Weiner's What Goes Up: The Uncensored History of Modern Wall Street as told by the bankers, brokers, CEOs and the Scoundrels Who Made It Happen; Benoit B. Mandelbrot and Richard L. Hudson's The (Mis) behavior of Markets: A Fractal View of Risk, Ruin and Reward and Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity by Raghuram G. Ragen and Luigi Zingales. Finally, former Clinton Labor Secretary, Robert Reich's Supercapitalism: The Transformation of Business, Democracy, and Everyday Life provides a thought-provoking perspective on the current economic context. ( For reviews of these books, click on the links and select "more information" under "more resources". )

Where to find more information? Websites that continuously follow business news and put things in perspective include: for daily headlines gathered together from multiple sources Google News is hard to beat, especially Google Business News. Starting with Google Business News you can sample up to the minute headlines, videos, and stories. Another good source of up to the minute business news from multiple providers is Yahoo Finance. There you will be able to access multiple business magazines and newspapers sites. CnnMoney is another website that consistently provides indepth coverage as well as video reports and up-to-the minute coverage. They have been especially good in exploring the current economic crisis and are consistently exploring cause as well as effect. You will visit it often. Also see the Business section of the New York Times for detailed coverage. Bloomberg, Business Week, Wall Street Journal's MarketWatch, and Forbes are worth consulting on a regular basis. For an international perspective see Financial Times and The Economist. Fortune and Money Magazines are each to be accessed through CnnMoney.

In consulting the above sites and books you will be able to contrast and sift information in this rapid and confusing environment. Most of the books can be found at the Berkshire Athenaeum, Pittsfield's Public Library

Risky Business 1 ( In the News )

Risky business!

Besides being the title of an early Tom Cruise movie, Risky Business are two words that sum up the last several months of financial news.

Let's review: Today, Monday, September 15 158 year old investment bank, Lehman Brothers, declared bankruptcy after a long weekend when other major banks and government entities could not agree to bail out Lehman. In fact chief Lehman suitor Bank of America, instead, bought 94 year old Investment Bank Merrill Lynch for 50 billion dollars in stock!

Confused? The Federal government and the Federal Reserve refused to back Lehman as it had earlier backed Investment Bank Bear Stearns, for which they had extended 28 billion dollars to back risk and allow Bear Stearns to be taken over by JP Morgan Chase, where it is now merged. So at the end of the day, where there had been five giant investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, Morgan Guaranty Trust -- only two were left standing as independent entities -- Goldman Sachs and Morgan Guaranty. The others were absorbed by still larger companies. Such is the risk of doing business in the Investment Banking sector! Until this week these companies were the very pillars of the financial world.

Wait! But there is more. One of the largest insurance companies in the world, AIG - American International Group has fallen at the end of today to a share price of $4.76, having lost billions of dollars in the last year and down from a high of $70 during a 52 week period. No doubt a great many investors have lost money. No doubt each of these companies has experienced a large amount of "short" selling and profit taking, ( see our blog post of August 7, Investopedia ), At the closing bell on the New York Stock Exchange AIG was fighting for its corporate life. AIG extends across the globe; its failure would have dramatic impact. So stay tuned. Warren Buffett is looking at AIG. The State of New York, where AIG resides, is allowing AIG to tap its (AIG's) assets for 20 billion dollars. Also 10 large banks have joined together to create a fund to loan 70 billion dollars to companies on the precipice. So powerful private and public forces are moving.

The Federal Government has been doing its part. Remember Fannie Mae and Freddie Mac ( see our blog post of July 17 on them ). They have now been taken over and are reorganizing. Since over five trillion dollars was at stake the Government could not allow Fannie Mae and Freddie Mac to fail. And of course there was the Indy Mac takeover by the Federal Deposit Insurance Corporation.

September 15, 2008 will be a day remembered far into the future in histories of American finance. The Dow Jones Industrial Average fell 504 ponts today the most since September 11, 2001. Are we going through a collapse? Or is it just the highs and lows of the "business cycle" a harsh correction to the "irrational exuberance" of recent years. Stocks overvalued are now contrasted with major stocks that are undervalued, an opportunity for investors willing to take the risk. Certainly AIG would seem ripe to buy, since it is so low, but this is a risky business after all. It's the time of the Buffetts and Templetons of the world. First the causes of these collapses must be understood. There is vast agreement that subprime loans and leveraged bad debt has brought down these giants, that and untold profits that have now turned to dust. Bank of America seems to be a company that has capitalized on these failures, acquiring Merrill Lynch and Countrywide ( the foremost perpetrator of subprime loan practices ) JP Morgan Chase is another company that has taken advantage of the crisis to purchase Bear Stearns at nearly "junk" prices.

The Housing Mortgage crisis continues but overpriced properties are coming down perhaps more closely to their true value. However there is widespread pain and foreclosure over these overpriced properties and financial bubbles built into the subprime mortgages loaned by companies such as Countrywide. The disasters there are now affecting the financiers who initially profited. The business environment remains volatile, like the gas prices at the pump.

In Risky Business II we will try to provide a primer as to where you may find more information, enough to begin to obtain perspective on what seems to be the daily economic crisis.

Google Inc -- Ten Years Old!

Do you Google?

Odds are that you do. Probably several times a day as you wend your way about the internet.

Google started out modestly but effectively Sept 7, 1998 by two Stanford University students, Larry Page and Sergey Brin, who on September 7, 2008 are still involved in the company's daily operations. Their search engine, Google, revolutionized search technology, creating fast, accurate results, gathered from millions, now billions of web pages. Today Google is a world wide company with 25,000 employees, a market capitalization of 150 billion dollars, and annual income of 16 billion dollars. Google (NASDAQ GOOG) is now a public traded and owned company with a current share price of $444.25.

When Google started out, it seemed preposterous to think of it as a money making business. How could simple search results make money? Google developed a simple effective strategy employing the user's interests in fostering a "click to pay" advertising system they named Google Adsense. Small text ads are placed next to search results, web pages, blog entries. A searcher clicks on ad and goes to the company's link. Income is generated both for the company and Google. Most of Google's revenues come from this system.

To celebrate its 10th birthday Google launched an internet browser, Google Chrome, as part of its long term strategy for the next 10 years. A video interview conducted by Financial Times United States Managing Editor Chrystia Freeland with Google CEO Eric Schmidt, explores Google's strategy for introducing Google Chrome. The unique features of Google Chrome are explored in a comic book by Scott McCloud, commissioned by Google. Since Google has partnership with internet browser Firefox, was another browser needed? Schmidt's answer is that Google Chrome takes a different path than Firefox. It is application, online software oriented, not simply web page gatherer. Google sees the dominant trend away from desktop applications to fully only online mostly free applications such as word processors, spreadsheets, email, business tools, file storage, and collaborative efforts, presentations and publishing.

Google Chrome is wholly free and open source, its code available to all, including its competitors. Firefox, which is also open source and non profit, has benefitted from the creative efforts of individual developers who have made Firefox a major force through its system of add-ons tailored to Firefox. Google Chrome cannot use Firefox add-ons but presumably developers will create add-ons for Google Chrome. Until then committed Firefox users will probably stay with Firefox. Microsoft, which controls 90% market share of Operating Systems (Windows), has seen a steady decline in its browser dominance since the introduction of Firefox. Internet Explorer currently holds 72% market share with Firefox nearly 20% and Apple's Safari 6.37%.
Much of Microsoft's dominance has come from its operating system bundling of Internet Explorer begun with Windows 95 and relationships with OEM's (Original Equipment Manufacturers), a strategy that effectively put Netscape out of business and catapulted Microsoft into years of battling claims of monopolistic practices in US and European courts.

Google dominates the Search environment with marketshare of 80% of all searches globally, followed by Yahoo with 12% and MSN (Microsoft network) with 3.46%. Besides Google Search Google provides 40+ fully developed internet services and applications, including GMail, You Tube, Blogger, Google Docs, Google Maps, Google Earth, Google Desktop, Reader, Notebook, Calendar, Google News and the list goes on. GMail with 7+ gigabytes of free storage forms the basis of a Google account and provides access to all services. Google Chrome's unique capacity allow individual web pages to be rendered as separate tabs, with a task manager for each tab. What this means is that computer memory is managed allowing for speed without accumulating so much memory that computer crashes. For each page Firefox and Internet Explorer gathers computer memory is tasked accumulatively, slowing performance down to a standstill if you have several windows open. Google Chrome is competitive as a memory management system and that speaks to its overall strategy of allowing multiple applications without unduly taxing computer memory.

Google wants to provide quick, easy access to information you want; allow you to use online word processors, spreadsheets, whatever application it is you want to use, and provide you with unlimited storage for all your files. That is the Google strategy for the next 10 years. It sees the internet as one vast operating system not owned by any one group, fostered by open access and open source for all who want to make use of these services. For businesses this represents almost unlimited opportunity.

Happy Birthday Google!

Want to read more about Google, see The Google Story by David A. Vise, Make Easy Money With Google: Using the Adsense Advertising Program by Eric Giguere, Google and the Mission to Map Meaning and Make Money by Bart Milner, and The Big Switch: Rewiring the World, From Edison to Google by Nicholas Carr. For Microsoft see Mary Jo Foley's Microsoft 2.0: How Microsoft Plans to Stay Relevant in the Post-Gates Era. All these works are available from the Berkshire Athenaeum or your local library. Google's philosophy and much other information is on its corporate web page. Up-to-minute information about Google Chrome and other products can be gotten from search on Google News with the product of your choice as search item.