Comments for the future

A Great App for Renting a Car

2011-10-20T07:22:00.001-07:00

NEED: Would love to have an app in my iPhone or iPad that would help me choose the car at my rent-a-car. Imagine if you are on the plane (and it has wi-fi) and you can browse the cars available in your iPad before landing. The need is simple, lets make renting a car much simpler than it is right now. You normally need to stop by the counter to get the keys. You normally need to get whatever the person at the counter wants to assign you. You normally have to have sometime of status to get the best service.

DESCRIPTION: What we need is a iPhone/iPad/name-your-device App that would allow you to browse the cars available at your rental car company at that moment in a specific location. Needless to say that the customer wants to see pictures of the actual car in the parking spot so you would need to figure that out. Maybe you start with standard photos (inside and outside pics) and later move to a video camera for the outside view. This would help also with the need to check for availability. We will also need a system similar to the ZipCar system that allows you to use your CARD as the key to any vehicle. You would also need a system that confirms what car is in what parking spot to make sure it is available. This can get complicated in location with a lot of traffic. My take on this is simply have (a) a GPS locator in each car (similar to an iPhone) to guarantee the car hasn’t left the lot and (b) a check-in point that matches each car that enters the lot to a parking spot (this can be done when the person at the rent-a-car is receiving the car).

SIZE: This could probably revolutionize the rental car industry. You can play it as unique proposition from one rental car company or you can develop the technology/system and sell it to all rental cars.

Community Network

2011-06-12T09:59:00.001-07:00

The other day I thought about this idea of having a community wi-fi network. I am sure it has happened to you as you are traveling or driving somewhere your iPhone (or other device) will ask you if you want to join a random wi-fi. These random wi-fi networks will change as you continue traveling because you start losing some connections and gaining others.

Now, imagine if all these random connection were tied to each other. So you iPhone would jump from one network to the other like cellphone towers. The only thing that you would need is to (1) be able to standardized all network security and connection settings (2) avoid the free-rider.

The way I thought we could do this is by creating a community wi-fi. You would need to register your own Wi-Fi network to be able to access this community network. This would avoid the free-rider problem. The key problem that I haven't been able to resolve is how to avoid security problems.

Any suggestion?

La Siguiente Revolucion Industrial

2011-02-10T09:54:00.001-08:00

Despues de escuchar a Shai Agassi hablar sobre su plan radical para convertir a varios países en libres de petróleo para el 2020, lo único que puedo hacer es compartirlo con ustedes.

http://www.ted.com/talks/lang/spa/shai_agassi_on_electric_cars.html

The New Facebook

2010-12-06T21:26:00.001-08:00

NEED: People are being overwhelmed by emails and marketing from different sites and companies about brand-related communications. You have the groupon and gilt-a-likes sending you discount and promotions every day. At the beginning people liked the idea and open and read every email. After a while people started to feel overwhelmed and aggregating sites started to become popular. Nevertheless there is no real solution today for the need of the people to communicate with their favorite brands.

DESCRIPTION: The idea here is to create an application or portal that can provide some solution to this need. It could be a facebook app or several facebook apps too. I am more incline that it has to be something different. Something not related to facebook.

SIZE: The size of this opportunity is relatively large. If successful it can become the sole communication channel for brands, avoiding any other type of new media communication. Everything would be centralized in one location where consumer know they can find what they are looking for. From information, to product and services.

U.S. Strains to Stop Arms Flow

2010-12-06T14:20:00.001-08:00

American officials say they have been frustrated in their efforts to block Syria, Iran, North Korea and other countries from selling arms to militants.

I wonder if American officials are equally frustrated in their efforts to block the Southern U.S. states from selling arms to Mexican Drug cartels and militia.

Wouldn’t you think that is equally important?

http://www.nytimes.com/2010/12/07/world/07wikileaks-weapons.html?emc=na

Working Remotely

2010-10-19T06:27:00.001-07:00

Need: As online post-secondary degrees further penetrate the education market, there is a need for graduates of these degrees to find jobs outside their city of residence. Most of them are not going to be able to afford (or want) to move to another city. There is a need for a solution that would allow these graduates and potential “national” employers to work something out.

Description: The big problem here is that the employer needs different types of control. A software package can solve these issues partially but there is a need for something else. Maybe there is an opportunity for very basic office locations that can be rented and monitored by the employer. A LA-based employer with an employee working in Phoenix could rent a cubicle in the Phoenix location and have access not only to the software his/her employee is using but to the monitoring system in that location.

Potential: There are currently 2MM people enrolled in online degrees in the United States. This number is expected to grow in the future at a rate of ~10% per year.

Changing Directions

2010-10-19T06:18:00.001-07:00

I have trouble tracking business ideas that I come up with. I forget to write them down or share them with someone. I believe that as you share your ideas with someone they either get better or just discarded. This is a very useful process for any entrepreneur.

For that reason I have decided that I’m going to track my ideas via my blog. From now on, I’m going to transform this blog into a collection of business ideas. Some of them will be really promising; some would be just a basic idea. Given that I’m a consultant I’m going to use a simple framework to organize these ideas.

The framework is as following:

Need: Description of the need that the business idea is trying to satisfy.

Description: How is the business idea satisfying the need?

Potential: A very rough approximation for market potential (customer base, size, or something else)

Let’s see how it goes.

Which Countries Would Prefer to Raise Taxes or Cut Spending

2010-09-28T13:02:00.000-07:00

Today The Economist published a survey from GlobeScan and PIPA for the BBC World Service that asked over 22,000 people in 22 countries which of these paths they would prefer their governments to take to reduce their country’s deficits: Increasing taxes, Cutting public services, Both, Neither or Other

(see link below for the picture)

In general, most people favored ‘Cutting public services’ more than anything else. More than 75% of people in France, Spain and Brazil really believe that ‘Cutting public services’ is the key to reducing the deficit in their countries. People in other countries like Britain, Mexico, Australia, Canada and Germany divide their opinion between ‘Cutting public services’ and ‘increasing taxes’. One quarter of the people in Russia and Turkey want their government to focus in neither ‘Cutting public services’ nor ‘increasing taxes’.

The interesting question here is what are the current level of ‘government spending’ and ‘effective taxes’. Is this survey just showing a return to the mean? Should we think that Brazil, Spain and France have economies more dependent on government spending? Should we think that Britain has a more balanced economy? What factors are influencing these answers?

Link to The Economist:

http://www.economist.com/node/17140165?story_id=17140165&fsrc=rss

Evolution to Diversity

2010-08-26T05:45:00.000-07:00

Since the 70s large and small firms in the US have been trying to become more diverse. The word "diversity" has had different implications with the pass of time. It started with race and gender decades ago. Nowadays it includes sexual orientation, cultural background, religion, among others.

The "business case for diversity", theorizes that in a global marketplace, a company that employs a diverse workforce (both men and women, people of many generations, people from ethnically and racially diverse backgrounds etc.) is better able to understand the demographics of the marketplace it serves and is thus better equipped to thrive in that marketplace than a company that has a more limited range of employee demographics (From Wikipedia)

In the path to diversity I believe there are 3 clear steps that a firm needs to take to become truely globally diverse.

1. Respect Each Other
First step of the process is to have a respectful environment. Starting with the CEO or President, the company need to respect the differences between the members of the firm. Respect is the stepping stone to a better culture. In this step I see firms that have their own diverse organization or affiliated groups. Here is where firms try to build a pipeline of diverse candidates using their current respectful culture to attract them. In certain cases, the firm will try to 'train' that diverse candidate in the ways of the firm.

2. Understand the Differences
When members of the firm are respectful they can start the path of trying to understand their differences. This step is more difficult to accomplish that what it seems. If you believe your firm has accomplish this step you are probably in the first step. Understanding the differences require a change in processes. Your believe that 'your way is the right way' has to change. There is a reason why the world doesn't operate the same way. If you still believe that your part of the world has it all figured out that is probably a sign of not being there yet. Those processes that change are not only related to recruiting, they are probably 75-85% of all your processes including but not limited to recruiting, training, retaining, promotion, and operation.

3. Cherish the Differences
By knowing that there are different and sometime 'better' ways to operate an entity, your firm can take advantage of these differences. Firms that have changed their processes to become more diverse are now empowered to cherish their differences. Firms that have accomplish this step can use their culture to be more adaptive/responsive to/of client's need. Those firms would probably enjoy of more innovative ideas and have a better chance of solving the next generation of problems.

Hedging Sadness

2010-07-02T09:17:00.000-07:00

After today's lost of Brazil against Netherlands in the World Cup, I realized that there should be a market to hedge the feeling that a Soccer fan feels when his/her team loses in events of such importance.

I would definitively pay some money to hedge this sadness. I want something more sophisticated than just betting against my team. I want a full sadness coverage. Something that covers me in case my team is eliminated in the first round of the World Cup. Then something else for the second round until de final.

Lo que Necesita Colombia: Estabilidad, certeza jurídica y seriedad para los proyectos de inversión

2010-06-02T11:28:00.000-07:00

[Quiero republicar un pedazo de esta entrevista con Michelle Bachelet –ex presidenta chilena— porque me pareció muy interesante. Para ver el texto completo por favor vayan al: http://www.semana.com/noticias-mundo/no-dejamos-trabajo-mercado/139502.aspx]

SEMANA: Colombia está en proceso de negociar tratados de libre comercio. ¿Qué beneficios le ha traído a Chile tener una economía abierta?

M.B: Chile es un país pequeño. Enfrentados al desafío de abrirnos al mundo, los gobiernos de la Concertación no dudamos que el camino era la apertura, la diversificación de las exportaciones, la promoción del libre comercio y el intercambio comercial con todo el mundo. Para eso implementamos políticas de fomentos de la competitividad que se traducen en el desarrollo de clusters o áreas productivas clave que están en condiciones de pararse de igual a igual con los productos y servicios de economías más grandes y desarrolladas. Hoy tenemos acceso -sin aranceles o con aranceles muy bajos- a un mercado mundial de 3.000 millones de consumidores, y nuestros productos están en Asia, Estados Unidos, Oceanía, China, América Latina, Europa, lo que ha implicado un salto enorme. Ahora estamos ampliando los acuerdos de libre comercio a las áreas de servicios y compras públicas.

SEMANA: Esa apertura suele ser muy buena para algunos sectores, pero no necesariamente para la generalidad. ¿Cómo hicieron para que la prosperidad de los empresarios y los inversionistas elevara el nivel de vida de tantos chilenos?

M.B: Permítame hacerle una precisión. Chile, durante los últimos 20 años, que son los de la Concertación, tuvo una definición estratégica en el empeño por mejorar la calidad de vida de los chilenos y chilenas. Me refiero a la educación, la salud, los salarios, las viviendas y los apoyos gubernamentales en subsidios a las familias. Es decir, no le dejamos el trabajo al mercado, al chorreo como dicen algunos, hubo aquí un rol del Estado con políticas públicas definidas y orientadas hacia el bienestar. Y dicho esto, le agrego que no es posible este bienestar sin el sector privado. Chile ofrece a los inversionistas chilenos y extranjeros estabilidad, certeza jurídica y seriedad para sus proyectos de inversión.

SEMANA: A pesar de su popularidad, usted no intentó cambiar las reglas para quedarse en el poder. ¿Qué piensa de la ola reeleccionista en América Latina?

M.B: Las leyes chilenas no permiten la reelección, y si alguien quiere hacerlo tiene que promover una reforma constitucional. Esta es una pregunta que me hicieron muchas veces. Y le voy a contestar lo que he dicho siempre: En la política hay que ser ético y estético. Y de ninguna manera hacer un traje a la medida del gobernante.

Unfair Judgement Against Tiger Woods

2010-04-08T12:00:00.000-07:00

On December 11, 2009, Woods announced he would take an indefinite leave from professional golf to focus on his marriage after he admitted infidelity. His multiple infidelities were revealed by over a dozen women, through many worldwide media sources.Woods returned to competition for the 2010 Masters on April 8, 2010, after a break lasting 20 weeks (Taken from Wikipedia)

By the time the media had revealed the number of infidelities Tiger Woods have had, the world (or more likely the U.S.) had already started its backlash against the sportsman's principles. The key argument to judge him so harshly was that Tiger Woods is a leading figure not only in golf but in sports in general. The U.S. population wanted Tiger to behave in a way that could set a good example to other people in and out of his field.

The basic conclusion with this reaction is that U.s. Americans believe that their leaders should set a good example for the entire population. This is the same principle that politicians in the U.S. are governed by. If a leader behaves badly or incorrectly, then his/her followers (e.g. the population) would required that leader to surrender its current leadership position and ask for forgiveness. This type of event has happened repeatedly over and over in U.S. history.

The problem arises when this basic argument is taken to the next level. Should the U.S. as the leader (or one of the leaders) of the world be held to the same standards and principles governing its population? Should the U.S. ask for forgiveness when behaving improperly? Should the U.S. government ask its population (and the world) for forgiveness for the mistakes made in the past?

Given that the U.S. government is just an entity representing the country's citizens, the U.S. citizens should be responsible for the U.S. government's actions. Why haven't the U.S. Americans held their government to the same standards they held their leaders?? Is it because U.S. Americans don't view their country as a moral leader in the world? Or is it just because a country should not be regulated by the same principles its population is?

My most logical explanation is that there is a voice in the U.S. that has asked for this type of behavior from its government but it hasn't been strong enough. So basically there are not enough people that care about it to make it a relevant point.

If this is the case, why do we still have this principle for each individual if the majority of the population doesn't care.

Maybe it is just about media coverage. Those leaders (being Tiger Wood or any politician) are held to a different standard not because they are leaders in their field but because they are on the eye of the media. If the media could benefit with judging the U.S. government for its mistake made against the world in the same way they benefit from the infidelities of Tiger Woods, then we could see the U.S. government be held to a different standard as the leader of the world.

Donde Se Originará la Siguiente Crisis Mundial?

2010-03-11T13:26:00.000-08:00

Es difícil concebir cual será la próxima crisis. ¿Sera una crisis inflacionaria dada las tasas de interés tan bajas? ¿Sera una crisis fiscal dada los niveles de endeudamiento de los diferentes países? ¿Sera una crisis civil dado un cambio en el nivel de violencia o corrupción?

Desde mi perspectiva las últimas crisis económicas relacionadas con el mercado accionario han comenzado con una percepción errónea de los valores de los activos involucrados. Esta percepción errónea viene de una combinación de factores como: complejidad del proceso de valoración o del instrumento, tamaño del mercado como tal, diferencias entre los jugadores dentro del sistema y falta de una norma clara.

Por ejemplo si pensamos en lo que le paso in el 2000 con las acciones relacionadas con internet. En este no existía una norma clara de cómo valorar estas empresas y los analistas pensaron que el mecanismo de valoración tenía que ser adaptado. Exista cierta complejidad dentro del proceso porque era un segmento nuevo para todos. Para que la burbuja se explote se necesito de otros catalizadores que hicieron despertarse a los inversionistas. Los inversionistas comenzaron a pensar más sobre el valor real de la acción y como estaban generando ellos mismo tanto dinero invirtiendo en este tipo de acciones.

Luego tenemos a Enron y las mismas características se reflejan en esta situación. 1. Complejidad en la estructura de negocios y productos, 2. Tamaño relevante como para llamar la atención un agente que ejecute una diligencia debida (en este caso una periodista y no un equity analyst) y 3. El ente regulador decide que la autoregulacion es la mejor alternativa para la industria.

En el caso de las hipotecas subprime que causo la crisis actual tiene las mismas características. Interesantemente aunque muchas personas sentían que existía una percepción errónea sobre el mercado hipotecario desde el 2005, este sistema no exploto hasta varios años después. La razón fue porque i) los jugadores estaban haciendo mucho dinero, ii) por lo que a nadie le importaba el valor real del activo, iii) no existía un ente regulador que vigilara los supuestos check and balances.

Por eso para poder estimar la siguiente crisis mundial tenemos que buscar un segmento que cumpla con las siguientes tres características:

1. Tiene que ser un segmento difícil de entender; ya sea porque el proceso es complicado, por la cultura, por la geografía, o por algo más. Si es complicado y la gente está haciendo dinero en este segmento, esto quiere decir que la mayoría de inversionistas simplemente está siguiendo la marea

2. Los jugadores en este segmento tienen que tener características y principios diferentes para que exista una desinformación de las diferentes partes. Esta característica va a ser el catalizador de la percepción errónea necesaria.

3. La percepción erronea tiene que ser sobre una parte relevante o grande para el segmento (tipo subprime, internet stocks, oil prices) se vea afectado y para que tenga un efecto domino al resto de la economía.

Mi voto va por China. Yo creo que la próxima gran recesión va a estar relacionado con China. De alguna u otra forma cumple con esos tres requisitos.

La Confianza Como Sistema Regulador

2010-02-11T12:53:00.000-08:00

Después de leer el artículo de Michael Lewis (The End of Wall Street) publicado Portfolio en Noviembre 2008 (y republicado en mi blog en el 2009) me quede pensando cómo muy pocas personas en Wall Street realmente saben que causo la gran recesión y se alinearon diferentes circunstancias para afectar la economía de la forma que la afecto. Inclusive me hizo pensar en el proceso de descubrimiento del valor (en inglés, price discovery process) de un activo, una acción o una deuda.

En el mundo de las finanzas existen varios mecanismos e instrumentos que le ayudan al inversionista a valorar un activo (como por el ejemplo el famoso flujo de cada descontado o DCF por sus siglas en ingles). Después de leer este articulo me di cuenta que quizás el proceso es mas subjetivo de lo que pensaba. Yo recordaba de mi época en banca de inversión que al final un DCF está compuesto de un sin número de suposiciones que pueden cambiar el valor del activo. Uno trataba de validar los resultados con otros métodos (como por ejemplo la valoración por múltiplos) por lo que se sentía que el valor final tenia no solamente lógica por el famoso DCF pero también porque era validado por otros analistas. Lo interesante es que al final la valoración está dada por 2 o 3 analistas estrellas que cubren la firma (los demás analistas simplemente son seguidores) y posiblemente si la empresa esta en una industria complicada de todos los analistas que la cubren una minoría realmente entiende que esta pasando.

Por eso en industrias complejas el famoso price discovery process no es tan sencillo como hacer un DCF porque los analistas que proveen la guía no están tan bien informados y la mayoría de jugadores involucrados en el proceso no les interesa encontrar el valor real de la acción sino solo hacer dinero. Estas circunstancias no son destructibles siempre y cuando no estemos hablando de una industria que abarque gran parte del sistema financiero de un país. Por ejemplo, si este problema lo tiene la industria de la educación postsecundaria, no es un problema tan grave. El problema de falta de entendimiento de la industria se reflejara en la volatilidad de los precios de las instituciones educativas que tranzan en el mercado.

El problema se encuentra cuando estas características se ven en una industria gigantesca o una industria que abarque otras industrias. Esto fue lo que sucedió con la crisis de los papeles subprime cuando se juntaron varias características o factores que causaron la gran recesión. Entre estos menciono algunos:

1. La complejidad del negocio (específicamente en el caso de los credit default swaps y demás derivadas de crédito utilizadas para crear liquidez en el mercado)

2. La poca sofisticación de los jugadores (aunque fuesen sofisticados en otros segmentos, este segmento era particularmente difícil de entender)

3. Los jugadores estaban mas preocupados por hacer dinero que por entender exactamente como estaban haciendo el dinero y los riesgos asociados con hacer ese tipo de dinero

4. No existía un ente o ley reguladora que ayudara a balancear los diferentes factores en el mercado y la desinformación de todos los jugadores (no solamente inversionistas pero también las personas que simplemente querían tener vivienda propia).

Esta recesión es claro ejemplo de lo que sucede cuando la confianza es la reguladora del sistema. En EEUU la confianza ha sido gran reguladora de muchos sistemas. Por ejemplo uno puedo devolver mercancía en EEUU porque todos confían que no están abusando del sistema. La confianza puede regular un sistema que no tenga jugadores con diferentes principios. En este caso se necesitaba una ley o un ente regulador. Esta es una de las razones por lo que esta crisis no se origino en otro país sino que se tuvo que generar en EEUU.

En Colombia o en América Latina, ya no existe confianza en que el sistema se autoregule. Se sabe que el jugador va a abusar del contrincante o del sistema de alguna manera posible, y si no existe esa manera se la inventa. Por eso en nuestros países la regulación tiene que venir de una manera clara y contundente para balancear los factores y crear un ambiente justo para todos los jugadores.

Historia de Luis Carlos Sarmiento Angulo

2010-01-17T13:34:00.000-08:00

El pasado mes de Noviembre la revista Semana (Colombia) publicó un artículo sobre uno de los hombres más poderosos de Colombia. Luis Carlos Sarmiento Angulo es el hombre más rico de Colombia.

El artículo es interesante porque describe como Luis Carlos Sarmiento Angulo pudo llegar a convertirse en el empresario mas poderoso de Colombia sin grandes recursos, palancas o conexiones.

De las enseñanzas que me deja este articulo tenemos:

1. "Trabajar, trabajar y trabajar"... si quiere hacer dinero le toca arremangarse.
2. Uno consigue los mejores oportunidades donde hay poca competencia. Ya sea hacer un acueducto en Alvarado, o comprar el peor banco del sistema financiero, o comprar con plata en mano accionista por accionista. Entre mas dificil sea el asunto menos competencia hay.
3. Sino sabe jugar ajedrez, comience a aprender. Todo es estrategia y si puedes comenzar a deducir cuales son los posibles movimientos de tu competencia tienes una ventaja competitiva.
4. Todos los negocios comienzan por los numeros pero se vuelven realidad a punta de convicción (obviamente trabajando, trabajando y trabajando).
5. "La clave de delegar es saber supervisar."
6. El bienestar familiar se impone al bienestar económico.

Aqui esta su historia completa...

http://www.semana.com/noticias-nacion/rey-midas/131990.aspx

Pensamientos desde Bolivia (Por Hernan)

2009-12-12T14:45:00.000-08:00

La semana pasada fui a ver un edificio que estaba ubicado a una hora de avión de La Paz hacia el norte (Rurrenabaque, Abel Iturralde) cerca de Brasil, y luego cruce un rio en balsa y después 8 horas en camioneta por la selva amazónica hasta llegar al edificio.

Cada día tuve que visitar un lugar distinto, muchas veces con un chofer que hable Aymará y Quechua, ya que en muchos lugares no hablan ¨el¨ castellano. Algunos de estos lugares generan mucha tristeza debido a que la pobreza es aguda. Algunos de estos pueblitos parecerían estar olvidados en la historia y a pesar de que tienen fe, yo creo que acá no llega ni su dios.

Estos viajes me permitieron no solo experimentar un calor y un sol calcínate, una selva del verde mas intenso, sino que también me pude descubrir la cultura de la Bolivia Profunda. Esta es una cultura sumamente amable, supersticiosa, y con todo el respeto, digo sufrida y sumisa. Nuestra cultura es sumamente más dominante y manipuladora.

La diferencia social, económica, cultural y educativa entre la clase campesina (indígena) y la clase alta es abismal. Parecería que es directamente proporcional el nivel educativo y económico a la amabilidad. Cuanto mayor la pobreza, mayor la gentileza.

Algo Hicimos Mal (Por Oscar Arias)

2009-11-11T09:10:00.000-08:00

Palabras del presidente Oscar Arias en la Cumbre de las Américas

Trinidad y Tobago (18 de abril del 2009)

Tengo la impresión de que cada vez que los países caribeños y latinoamericanos se reúnen con el presidente de los Estados Unidos de América, es para pedirle cosas o para reclamarle cosas. Casi siempre, es para culpar a Estados Unidos de nuestros males pasados, presentes y futuros. No creo que eso sea del todo justo.

No podemos olvidar que América Latina tuvo universidades antes de que Estados Unidos creara Harvard y William & Mary, que son las primeras universidades de ese país. No podemos olvidar que en este continente, como en el mundo entero, por lo menos hasta 1750 todos los americanos eran más o menos iguales: todos eran pobres.

Cuando aparece la Revolución Industrial en Inglaterra, otros países se montan en ese vagón: Alemania, Francia, Estados Unidos, Canadá, Australia, Nueva Zelanda... y así la Revolución Industrial pasó por América Latina como un cometa, y no nos dimos cuenta. Ciertamente perdimos la oportunidad.

También hay una diferencia muy grande. Leyendo la historia de América Latina, comparada con la historia de Estados Unidos, uno comprende que Latinoamérica no tuvo un John Winthrop español, ni portugués, que viniera con la Biblia en su mano dispuesto a construir "una Ciudad sobre una Colina", una ciudad que brillara, como fue la pretensión de los peregrinos que llegaron a Estados Unidos.

Hace 50 años, México era más rico que Portugal . En 1950, un país como Brasil tenía un ingreso per cápita más elevado que el de Corea del Sur. Hace 60 años, Honduras tenía más riqueza per cápita que Singapur, y hoy Singapur -en cuestión de 35 ó 40 años- es un país con $40.000 de ingreso anual por habitante. Bueno, algo hicimos mal los latinoamericanos.

¿Qué hicimos mal? No puedo enumerar todas las cosas que hemos hecho mal. Para comenzar, tenemos una escolaridad de 7 años. Esa es la escolaridad promedio de América Latina y no es el caso de la mayoría de los países asiáticos. Ciertamente no es el caso de países como Estados Unidos y Canadá, con la mejor educación del mundo, similar a la de los europeos. De cada 10 estudiantes que ingresan a la secundaria en América Latina, en algunos países solo uno termina esa secundaria. Hay países que tienen una mortalidad infantil de 50 niños por cada mil, cuando el promedio en los países asiáticos más avanzados es de 8, 9 ó 10.

Nosotros tenemos países donde la carga tributaria es del 12% del producto interno bruto, y no es responsabilidad de nadie, excepto la nuestra, que no le cobremos dinero a la gente más rica de nuestros países. Nadie tiene la culpa de eso, excepto nosotros mismos.

En 1950, cada ciudadano norteamericano era cuatro veces más rico que un ciudadano latinoamericano. Hoy en día, un ciudadano norteamericano es 10, 15 ó 20 veces más rico que un latinoamericano. Eso no es culpa de Estados Unidos, es culpa nuestra.

En mi intervención de esta mañana, me referí a un hecho que para mí es grotesco, y que lo único que demuestra es que el sistema de valores del siglo XX, que parece ser el que estamos poniendo en práctica también en el siglo XXI, es un sistema de valores equivocado. Porque no puede ser que el mundo rico dedique 100.000 millones de dólares para aliviar la pobreza del 80% de la población del mundo -en un planeta que tiene 2.500 millones de seres humanos con un ingreso de $2 por día- y que gaste 13 veces más ($1.300.000. 000.000) en armas y soldados.

Como lo dije esta mañana, no puede ser que América Latina se gaste $50.000 millones en armas y soldados. Yo me pregunto: ¿quién es el enemigo nuestro? El enemigo nuestro, presidente Correa, de esa desigualdad que usted apunta con mucha razón, es la falta de educación; es el analfabetismo; es que no gastamos en la salud de nuestro pueblo; que no creamos la infraestructura necesaria, los caminos, las carreteras, los puertos, los aeropuertos; que no estamos dedicando los recursos necesarios para detener la degradación del medio ambiente; es la desigualdad que tenemos, que realmente nos avergüenza; es producto, entre muchas cosas, por supuesto, de que no estamos educando a nuestros hijos y a nuestras hijas.

Uno va a una universidad latinoamericana y todavía parece que estamos en los sesenta, setenta u ochenta. Parece que se nos olvidó que el 9 de noviembre de 1989 pasó algo muy importante, al caer el Muro de Berlín, y que el mundo cambió. Tenemos que aceptar que este es un mundo distinto, y en eso francamente pienso que todos los académicos, que toda la gente de pensamiento, que todos los economistas, que todos los historiadores, casi que coinciden en que el siglo XXI es el siglo de los asiáticos, no de los latinoamericanos. Y yo, lamentablemente, coincido con ellos. Porque mientras nosotros seguimos discutiendo sobre ideologías, seguimos discutiendo sobre todos los "ismos" (¿cuál es el mejor? capitalismo, socialismo, comunismo, liberalismo, neoliberalismo, socialcristianismo. ..), los asiáticos encontraron un "ismo" muy realista para el siglo XXI y el final del siglo XX, que es el pragmatismo .

Para solo citar un ejemplo, recordemos que cuando Deng Xiaoping visitó Singapur y Corea del Sur, después de haberse dado cuenta de que sus propios vecinos se estaban enriqueciendo de una manera muy acelerada, regresó a Pekín y dijo a los viejos camaradas maoístas que lo habían acompañado en la Larga Marcha: "Bueno, la verdad, queridos camaradas, es que mí no me importa si el gato es blanco o negro, lo único que me interesa es que cace ratones" . Y si hubiera estado vivo Mao, se hubiera muerto de nuevo cuando dijo que " la verdad es que enriquecerse es glorioso ". Y mientras los chinos hacen esto, y desde el 79 a hoy crecen a un 11%, 12% o 13%, y han sacado a 300 millones de habitantes de la pobreza, nosotros seguimos discutiendo sobre ideologías que tuvimos que haber enterrado hace mucho tiempo atrás.

La buena noticia es que esto lo logró Deng Xioping cuando tenía 74 años. Viendo alrededor, queridos Presidentes, no veo a nadie que esté cerca de los 74 años. Por eso solo les pido que no esperemos a cumplirlos para hacer los cambios que tenemos que hacer.

Muchas gracias.

The End of Philosophy (By David Brooks)

2009-10-11T23:00:00.000-07:00

By DAVID BROOKS

Socrates talked. The assumption behind his approach to philosophy, and the approaches of millions of people since, is that moral thinking is mostly a matter of reason and deliberation: Think through moral problems. Find a just principle. Apply it.

One problem with this kind of approach to morality, as Michael Gazzaniga writes in his 2008 book, “Human,” is that “it has been hard to find any correlation between moral reasoning and proactive moral behavior, such as helping other people. In fact, in most studies, none has been found.”

Today, many psychologists, cognitive scientists and even philosophers embrace a different view of morality. In this view, moral thinking is more like aesthetics. As we look around the world, we are constantly evaluating what we see. Seeing and evaluating are not two separate processes. They are linked and basically simultaneous.

As Steven Quartz of the California Institute of Technology said during a recent discussion of ethics sponsored by the John Templeton Foundation, “Our brain is computing value at every fraction of a second. Everything that we look at, we form an implicit preference. Some of those make it into our awareness; some of them remain at the level of our unconscious, but ... what our brain is for, what our brain has evolved for, is to find what is of value in our environment.”

Think of what happens when you put a new food into your mouth. You don’t have to decide if it’s disgusting. You just know. You don’t have to decide if a landscape is beautiful. You just know.

Moral judgments are like that. They are rapid intuitive decisions and involve the emotion-processing parts of the brain. Most of us make snap moral judgments about what feels fair or not, or what feels good or not. We start doing this when we are babies, before we have language. And even as adults, we often can’t explain to ourselves why something feels wrong.

In other words, reasoning comes later and is often guided by the emotions that preceded it. Or as Jonathan Haidt of the University of Virginia memorably wrote, “The emotions are, in fact, in charge of the temple of morality, and ... moral reasoning is really just a servant masquerading as a high priest.”

The question then becomes: What shapes moral emotions in the first place? The answer has long been evolution, but in recent years there’s an increasing appreciation that evolution isn’t just about competition. It’s also about cooperation within groups. Like bees, humans have long lived or died based on their ability to divide labor, help each other and stand together in the face of common threats. Many of our moral emotions and intuitions reflect that history. We don’t just care about our individual rights, or even the rights of other individuals. We also care about loyalty, respect, traditions, religions. We are all the descendents of successful cooperators.

The first nice thing about this evolutionary approach to morality is that it emphasizes the social nature of moral intuition. People are not discrete units coolly formulating moral arguments. They link themselves together into communities and networks of mutual influence.

The second nice thing is that it entails a warmer view of human nature. Evolution is always about competition, but for humans, as Darwin speculated, competition among groups has turned us into pretty cooperative, empathetic and altruistic creatures — at least within our families, groups and sometimes nations.

The third nice thing is that it explains the haphazard way most of us lead our lives without destroying dignity and choice. Moral intuitions have primacy, Haidt argues, but they are not dictators. There are times, often the most important moments in our lives, when in fact we do use reason to override moral intuitions, and often those reasons — along with new intuitions — come from our friends.

The rise and now dominance of this emotional approach to morality is an epochal change. It challenges all sorts of traditions. It challenges the bookish way philosophy is conceived by most people. It challenges the Talmudic tradition, with its hyper-rational scrutiny of texts. It challenges the new atheists, who see themselves involved in a war of reason against faith and who have an unwarranted faith in the power of pure reason and in the purity of their own reasoning.

Finally, it should also challenge the very scientists who study morality. They’re good at explaining how people make judgments about harm and fairness, but they still struggle to explain the feelings of awe, transcendence, patriotism, joy and self-sacrifice, which are not ancillary to most people’s moral experiences, but central. The evolutionary approach also leads many scientists to neglect the concept of individual responsibility and makes it hard for them to appreciate that most people struggle toward goodness, not as a means, but as an end in itself.

How the Internet Got its Rules (By Stephen Crocker)

2009-09-11T17:36:00.000-07:00

By STEPHEN D. CROCKER

Bethesda, Md.

TODAY is an important date in the history of the Internet: the 40th anniversary of what is known as the Request for Comments. Outside the technical community, not many people know about the R.F.C.’s, but these humble documents shape the Internet’s inner workings and have played a significant role in its success.

When the R.F.C.’s were born, there wasn’t a World Wide Web. Even by the end of 1969, there was just a rudimentary network linking four computers at four research centers: the University of California, Los Angeles; the Stanford Research Institute; the University of California, Santa Barbara; and the University of Utah in Salt Lake City. The government financed the network and the hundred or fewer computer scientists who used it. It was such a small community that we all got to know one another.

A great deal of deliberation and planning had gone into the network’s underlying technology, but no one had given a lot of thought to what we would actually do with it. So, in August 1968, a handful of graduate students and staff members from the four sites began meeting intermittently, in person, to try to figure it out. (I was lucky enough to be one of the U.C.L.A. students included in these wide-ranging discussions.) It wasn’t until the next spring that we realized we should start writing down our thoughts. We thought maybe we’d put together a few temporary, informal memos on network protocols, the rules by which computers exchange information. I offered to organize our early notes.

What was supposed to be a simple chore turned out to be a nerve-racking project. Our intent was only to encourage others to chime in, but I worried we might sound as though we were making official decisions or asserting authority. In my mind, I was inciting the wrath of some prestigious professor at some phantom East Coast establishment. I was actually losing sleep over the whole thing, and when I finally tackled my first memo, which dealt with basic communication between two computers, it was in the wee hours of the morning. I had to work in a bathroom so as not to disturb the friends I was staying with, who were all asleep.

Still fearful of sounding presumptuous, I labeled the note a “Request for Comments.” R.F.C. 1, written 40 years ago today, left many questions unanswered, and soon became obsolete. But the R.F.C.’s themselves took root and flourished. They became the formal method of publishing Internet protocol standards, and today there are more than 5,000, all readily available online.

But we started writing these notes before we had e-mail, or even before the network was really working, so we wrote our visions for the future on paper and sent them around via the postal service. We’d mail each research group one printout and they’d have to photocopy more themselves.

The early R.F.C.’s ranged from grand visions to mundane details, although the latter quickly became the most common. Less important than the content of those first documents was that they were available free of charge and anyone could write one. Instead of authority-based decision-making, we relied on a process we called “rough consensus and running code.” Everyone was welcome to propose ideas, and if enough people liked it and used it, the design became a standard.

After all, everyone understood there was a practical value in choosing to do the same task in the same way. For example, if we wanted to move a file from one machine to another, and if you were to design the process one way, and I was to design it another, then anyone who wanted to talk to both of us would have to employ two distinct ways of doing the same thing. So there was plenty of natural pressure to avoid such hassles. It probably helped that in those days we avoided patents and other restrictions; without any financial incentive to control the protocols, it was much easier to reach agreement.

This was the ultimate in openness in technical design and that culture of open processes was essential in enabling the Internet to grow and evolve as spectacularly as it has. In fact, we probably wouldn’t have the Web without it. When CERN physicists wanted to publish a lot of information in a way that people could easily get to it and add to it, they simply built and tested their ideas. Because of the groundwork we’d laid in the R.F.C.’s, they did not have to ask permission, or make any changes to the core operations of the Internet. Others soon copied them — hundreds of thousands of computer users, then hundreds of millions, creating and sharing content and technology. That’s the Web.

Put another way, we always tried to design each new protocol to be both useful in its own right and a building block available to others. We did not think of protocols as finished products, and we deliberately exposed the internal architecture to make it easy for others to gain a foothold. This was the antithesis of the attitude of the old telephone networks, which actively discouraged any additions or uses they had not sanctioned.

Of course, the process for both publishing ideas and for choosing standards eventually became more formal. Our loose, unnamed meetings grew larger and semi-organized into what we called the Network Working Group. In the four decades since, that group evolved and transformed a couple of times and is now the Internet Engineering Task Force. It has some hierarchy and formality but not much, and it remains free and accessible to anyone.

The R.F.C.’s have grown up, too. They really aren’t requests for comments anymore because they are published only after a lot of vetting. But the culture that was built up in the beginning has continued to play a strong role in keeping things more open than they might have been. Ideas are accepted and sorted on their merits, with as many ideas rejected by peers as are accepted.

As we rebuild our economy, I do hope we keep in mind the value of openness, especially in industries that have rarely had it. Whether it’s in health care reform or energy innovation, the largest payoffs will come not from what the stimulus package pays for directly, but from the huge vistas we open up for others to explore.

I was reminded of the power and vitality of the R.F.C.’s when I made my first trip to Bangalore, India, 15 years ago. I was invited to give a talk at the Indian Institute of Science, and as part of the visit I was introduced to a student who had built a fairly complex software system. Impressed, I asked where he had learned to do so much. He simply said, “I downloaded the R.F.C.’s and read them.”

The End of Wall Street (By Michael Lewis) 7/7

2009-08-11T08:51:00.000-07:00

[In the next 7 postings I'm going to publish an article from Michael Lewis in Nov 11, 2008 in Portfolio.com]

On July 19, 2007, the same day that Federal Reserve Chairman Ben Bernanke told the U.S. Senate that he anticipated as much as $100 billion in losses in the subprime-mortgage market, FrontPoint did something unusual: It hosted its own conference call. It had had calls with its tiny population of investors, but this time FrontPoint opened it up. Steve Eisman had become a poorly kept secret. Five hundred people called in to hear what he had to say, and another 500 logged on afterward to listen to a recording of it. He explained the strange alchemy of the C.D.O. and said that he expected losses of up to $300 billion from this sliver of the market alone. To evaluate the situation, he urged his audience to “just throw your model in the garbage can. The models are all backward-looking.

The models don’t have any idea of what this world has become…. For the first time in their lives, people in the asset-backed-securitization world are actually having to think.” He explained that the rating agencies were morally bankrupt and living in fear of becoming actually bankrupt. “The rating agencies are scared to death,” he said. “They’re scared to death about doing nothing because they’ll look like fools if they do nothing.”

On September 18, 2008, Danny Moses came to work as usual at 6:30 a.m. Earlier that week, Lehman Brothers had filed for bankruptcy. The day before, the Dow had fallen 449 points to its lowest level in four years. Overnight, European governments announced a ban on short-selling, but that served as faint warning for what happened next.

At the market opening in the U.S., everything—every financial asset—went into free fall. “All hell was breaking loose in a way I had never seen in my career,” Moses says. FrontPoint was net short the market, so this total collapse should have given Moses pleasure. He might have been forgiven if he stood up and cheered. After all, he’d been betting for two years that this sort of thing could happen, and now it was, more dramatically than he had ever imagined. Instead, he felt this terrifying shudder run through him. He had maybe 100 trades on, and he worked hard to keep a handle on them all. “I spent my morning trying to control all this energy and all this information,” he says, “and I lost control. I looked at the screens. I was staring into the abyss. The end. I felt this shooting pain in my head. I don’t get headaches. At first, I thought I was having an aneurysm.”

Moses stood up, wobbled, then turned to Daniel and said, “I gotta leave. Get out of here. Now.” Daniel thought about calling an ambulance but instead took Moses out for a walk.

Outside it was gorgeous, the blue sky reaching down through the tall buildings and warming the soul. Eisman was at a Goldman Sachs conference for hedge fund managers, raising capital. Moses and Daniel got him on the phone, and he left the conference and met them on the steps of St. Patrick’s Cathedral. “We just sat there,” Moses says. “Watching the people pass.”

This was what they had been waiting for: total collapse. “The investment-banking industry is fucked,” Eisman had told me a few weeks earlier. “These guys are only beginning to understand how fucked they are. It’s like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: ‘Holy shit, I’m wrong!’ ” Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just fucked; they were extinct.

Not so for hedge fund managers who had seen it coming. “As we sat there, we were weirdly calm,” Moses says. “We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pass and talked about what might happen next. How many of these people were going to lose their jobs. Who was going to rent these buildings after all the Wall Street firms collapsed.” Eisman was appalled. “Look,” he said. “I’m short. I don’t want the country to go into a depression. I just want it to fucking deleverage.” He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. “That Wall Street has gone down because of this is justice,” he says. “They fucked people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

Truth to tell, there wasn’t a whole lot of hand-wringing inside FrontPoint either. The only one among them who wrestled a bit with his conscience was Daniel. “Vinny, being from Queens, needs to see the dark side of everything,” Eisman says. To which Daniel replies, “The way we thought about it was, ‘By shorting this market we’re creating the liquidity to keep the market going.’ ”

“It was like feeding the monster,” Eisman says of the market for subprime bonds. “We fed the monster until it blew up.”

About the time they were sitting on the steps of the midtown cathedral, I sat in a booth in a restaurant on the East Side, waiting for John Gutfreund to arrive for lunch, and wondered, among other things, why any restaurant would seat side by side two men without the slightest interest in touching each other.

There was an umbilical cord running from the belly of the exploded beast back to the financial 1980s. A friend of mine created the first mortgage derivative in 1986, a year after we left the Salomon Brothers trading program. (“The problem isn’t the tools,” he likes to say. “It’s who is using the tools. Derivatives are like guns.”)

When I published my book, the 1980s were supposed to be ending. I received a lot of undeserved credit for my timing. The social disruption caused by the collapse of the savings-and-loan industry and the rise of hostile takeovers and leveraged buyouts had given way to a brief period of recriminations. Just as most students at Ohio State read Liar’s Poker as a manual, most TV and radio interviewers regarded me as a whistleblower. (The big exception was Geraldo Rivera. He put me on a show called “People Who Succeed Too Early in Life” along with some child actors who’d gone on to become drug addicts.) Anti-Wall Street feeling ran high—high enough for Rudy Giuliani to float a political career on it—but the result felt more like a witch hunt than an honest reappraisal of the financial order. The public lynchings of Gutfreund and junk-bond king Michael Milken were excuses not to deal with the disturbing forces underpinning their rise. Ditto the cleaning up of Wall Street’s trading culture. The surface rippled, but down below, in the depths, the bonus pool remained undisturbed. Wall Street firms would soon be frowning upon profanity, firing traders for so much as glancing at a stripper, and forcing male employees to treat women almost as equals. Lehman Brothers circa 2008 more closely resembled a normal corporation with solid American values than did any Wall Street firm circa 1985

The changes were camouflage. They helped distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture.

I’d not seen Gutfreund since I quit Wall Street. I’d met him, nervously, a couple of times on the trading floor. A few months before I left, my bosses asked me to explain to Gutfreund what at the time seemed like exotic trades in derivatives I’d done with a European hedge fund. I tried. He claimed not to be smart enough to understand any of it, and I assumed that was how a Wall Street C.E.O. showed he was the boss, by rising above the details. There was no reason for him to remember any of these encounters, and he didn’t: When my book came out and became a public-relations nuisance to him, he told reporters we’d never met.

Over the years, I’d heard bits and pieces about Gutfreund. I knew that after he’d been forced to resign from Salomon Brothers he’d fallen on harder times. I heard later that a few years ago he’d sat on a panel about Wall Street at Columbia Business School. When his turn came to speak, he advised students to find something more meaningful to do with their lives. As he began to describe his career, he broke down and wept.

When I emailed him to invite him to lunch, he could not have been more polite or more gracious. That attitude persisted as he was escorted to the table, made chitchat with the owner, and ordered his food. He’d lost a half-step and was more deliberate in his movements, but otherwise he was completely recognizable. The same veneer of denatured courtliness masked the same animal need to see the world as it was, rather than as it should be.

We spent 20 minutes or so determining that our presence at the same lunch table was not going to cause the earth to explode. We discovered we had a mutual acquaintance in New Orleans. We agreed that the Wall Street C.E.O. had no real ability to keep track of the frantic innovation occurring inside his firm. (“I didn’t understand all the product lines, and they don’t either,” he said.) We agreed, further, that the chief of the Wall Street investment bank had little control over his subordinates. (“They’re buttering you up and then doing whatever the fuck they want to do.”) He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.

But I didn’t argue with him. For just as you revert to being about nine years old when you visit your parents, you revert to total subordination when you are in the presence of your former C.E.O. John Gutfreund was still the King of Wall Street, and I was still a geek. He spoke in declarative statements; I spoke in questions.

But as he spoke, my eyes kept drifting to his hands. His alarmingly thick and meaty hands. They weren’t the hands of a soft Wall Street banker but of a boxer. I looked up. The boxer was smiling—though it was less a smile than a placeholder expression. And he was saying, very deliberately, “Your…fucking…book.”

I smiled back, though it wasn’t quite a smile.

“Your fucking book destroyed my career, and it made yours,” he said.

I didn’t think of it that way and said so, sort of.

“Why did you ask me to lunch?” he asked, though pleasantly. He was genuinely curious.

You can’t really tell someone that you asked him to lunch to let him know that you don’t think of him as evil. Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.) He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.’s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

It was now all someone else’s fault.

He watched me curiously as I scribbled down his words. “What’s this for?” he asked.

I told him I thought it might be worth revisiting the world I’d described in Liar’s Poker, now that it was finally dying. Maybe bring out a 20th-anniversary edition.

“That’s nauseating,” he said.

Hard as it was for him to enjoy my company, it was harder for me not to enjoy his. He was still tough, as straight and blunt as a butcher. He’d helped create a monster, but he still had in him a lot of the old Wall Street, where people said things like “A man’s word is his bond.” On that Wall Street, people didn’t walk out of their firms and cause trouble for their former bosses by writing books about them. “No,” he said, “I think we can agree about this: Your fucking book destroyed my career, and it made yours.” With that, the former king of a former Wall Street lifted the plate that held his appetizer and asked sweetly, “Would you like a deviled egg?”

Until that moment, I hadn’t paid much attention to what he’d been eating. Now I saw he’d ordered the best thing in the house, this gorgeous frothy confection of an earlier age. Who ever dreamed up the deviled egg? Who knew that a simple egg could be made so complicated and yet so appealing? I reached over and took one. Something for nothing. It never loses its charm

The End of Wall Street (By Michael Lewis) 6/7

2009-07-11T08:49:00.000-07:00

[In the next 7 postings I'm going to publish an article from Michael Lewis in Nov 11, 2008 in Portfolio.com]

Eisman, Daniel, and Moses then flew out to Las Vegas for an even bigger subprime conference. By now, Eisman knew everything he needed to know about the quality of the loans being made. He still didn’t fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine. He was at once opportunistic and outraged.

Their first stop was a speech given by the C.E.O. of Option One, the mortgage originator owned by H&R Block. When the guy got to the part of his speech about Option One’s subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. “It wasn’t a Q&A,” says Moses. “The guy was giving a speech. He sees Steve’s hand and says, ‘Yes?’”

“Would you say that 5 percent is a probability or a possibility?” Eisman asked.

A probability, said the C.E.O., and he continued his speech.

Eisman had his hand up in the air again, waving it around. Oh, no, Moses thought. “The one thing Steve always says,” Daniel explains, “is you must assume they are lying to you. They will always lie to you.” Moses and Daniel both knew what Eisman thought of these subprime lenders but didn’t see the need for him to express it here in this manner. For Eisman wasn’t raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said.

“Yes?” the C.E.O. said, obviously irritated. “Is that another question?”

“No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out.

Eisman’s willingness to be abrasive in order to get to the heart of the matter was obvious to all; what was harder to see was his credulity: He actually wanted to believe in the system. As quick as he was to cry bullshit when he saw it, he was still shocked by bad behavior. That night in Vegas, he was seated at dinner beside a really nice guy who invested in mortgage C.D.O.’s—collateralized debt obligations. By then, Eisman thought he knew what he needed to know about C.D.O.’s. He didn’t, it turned out.

Later, when I sit down with Eisman, the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. “You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot fucking believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog shit lower than the original bonds.”

FrontPoint had spent a lot of time digging around in the dog shit and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.

“No,” the guy said, “I’ve sold everything out.”

After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You prick, you don’t give a fuck about the investors in this thing

Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

This particular dinner was hosted by Deutsche Bank, whose head trader, Greg Lippman, was the fellow who had introduced Eisman to the subprime bond market. Eisman went and found Lippman, pointed back to his own dinner companion, and said, “I want to short him.” Lippman thought he was joking; he wasn’t. “Greg, I want to short his paper,” Eisman repeated. “Sight unseen.”

Eisman started out running a $60 million equity fund but was now short around $600 million of various subprime-related securities. In the spring of 2007, the market strengthened. But, says Eisman, “credit quality always gets better in March and April. And the reason it always gets better in March and April is that people get their tax refunds. You would think people in the securitization world would know this. We just thought that was moronic.”

He was already short the stocks of mortgage originators and the homebuilders. Now he took short positions in the rating agencies—“they were making 10 times more rating C.D.O.’s than they were rating G.M. bonds, and it was all going to end”—and, finally, the biggest Wall Street firms because of their exposure to C.D.O.’s. He wasn’t allowed to short Morgan Stanley because it owned a stake in his fund. But he shorted UBS, Lehman Brothers, and a few others. Not long after that, FrontPoint had a visit from Sanford C. Bernstein’s Brad Hintz, a prominent analyst who covered Wall Street firms. Hintz wanted to know what Eisman was up to. “We just shorted Merrill Lynch,” Eisman told him.

“Why?” asked Hintz.

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007. “The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?” Eisman had long subscribed to Grant’s Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.’s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.’s to potential investors and for several days sweated and groaned and heaved and suffered. “Then he came back,” says Grant, “and said, ‘I can’t figure this thing out.’ And I said, ‘I think we have our story.

Eisman read Grant’s piece as independent confirmation of what he knew in his bones about the C.D.O.’s he had shorted. “When I read it, I thought, Oh my God. This is like owning a gold mine. When I read that, I was the only guy in the equity world who almost had an orgasm.”

The End of Wall Street (By Michael Lewis) 5/7

2009-06-11T08:49:00.000-07:00

[In the next 7 postings I'm going to publish an article from Michael Lewis in Nov 11, 2008 in Portfolio.com]

In retrospect, pretty much all of the riskiest subprime-backed bonds were worth betting against; they would all one day be worth zero. But at the time Eisman began to do it, in the fall of 2006, that wasn’t clear. He and his team set out to find the smelliest pile of loans they could so that they could make side bets against them with Goldman Sachs or Deutsche Bank. What they were doing, oddly enough, was the analysis of subprime lending that should have been done before the loans were made: Which poor Americans were likely to jump which way with their finances? How much did home prices need to fall for these loans to blow up? (It turned out they didn’t have to fall; they merely needed to stay flat.) The default rate in Georgia was five times higher than that in Florida even though the two states had the same unemployment rate. Why? Indiana had a 25 percent default rate; California’s was only 5 percent. Why?

Moses actually flew down to Miami and wandered around neighborhoods built with subprime loans to see how bad things were. “He’d call me and say, ‘Oh my God, this is a calamity here,’ ” recalls Eisman. All that was required for the BBB bonds to go to zero was for the default rate on the underlying loans to reach 14 percent. Eisman thought that, in certain sections of the country, it would go far, far higher.

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

[Editor's Note: After this story was published, Vickie A. Tillman, Standard & Poor's executive vice president, responded with a letter to Portfolio. "Lewis quotes short-seller Steve Eisman, who asserts that in rating residential mortgage-backed securities, Standard & Poor's assumed that 'home prices would keep going up' and that our models 'had no ability to accept a negative number.' Both assertions are false. Our model has always incorporated the assumption that home prices will decline. Our market-value-decline assumptions are disclosed in our published criteria. When new information is available, Standard & Poor's incorporates the information into its analysis, and we may decide it is appropriate to change the rating or the rating outlook."]

As an investor, Eisman was allowed on the quarterly conference calls held by Moody’s but not allowed to ask questions. The people at Moody’s were polite about their brush-off, however. The C.E.O. even invited Eisman and his team to his office for a visit in June 2007. By then, Eisman was so certain that the world had been turned upside down that he just assumed this guy must know it too. “But we’re sitting there,” Daniel recalls, “and he says to us, like he actually means it, ‘I truly believe that our rating will prove accurate.’ And Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him.”

“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.”

This wasn’t Fitch or even S&P. This was Moody’s, the aristocrats of the rating business, 20 percent owned by Warren Buffett. And the company’s C.E.O. was being told he was either a fool or a crook by one Vincent Daniel, from Queens.

A full nine months earlier, Daniel and Moses had flown to Orlando for an industry conference. It had a grand title—the American Securitization Forum—but it was essentially a trade show for the subprime-mortgage business: the people who originated subprime mortgages, the Wall Street firms that packaged and sold subprime mortgages, the fund managers who invested in nothing but subprime-mortgage-backed bonds, the agencies that rated subprime-mortgage bonds, the lawyers who did whatever the lawyers did. Daniel and Moses thought they were paying a courtesy call on a cottage industry, but the cottage had become a castle. “There were like 6,000 people there,” Daniel says. “There were so many people being fed by this industry. The entire fixed-income department of each brokerage firm is built on this. Everyone there was the long side of the trade. The wrong side of the trade. And then there was us. That’s when the picture really started to become clearer, and we started to get more cynical, if that was possible. We went back home and said to Steve, ‘You gotta see this.’ ”

The End of Wall Street (By Michael Lewis) 4/7

2009-05-11T08:48:00.000-07:00

[In the next 7 postings I'm going to publish an article from Michael Lewis in Nov 11, 2008 in Portfolio.com]

At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.” Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. “It wasn’t that hard in hindsight to see it,” she says. “It was very hard to know when it would stop.” Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.

By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why. He had a from-the-ground-up understanding of both the U.S. housing market and Wall Street. But he’d spent his life in the stock market, and it was clear that the stock market was, in this story, largely irrelevant. “What most people don’t realize is that the fixed-income world dwarfs the equity world,” he says. “The equity world is like a fucking zit compared with the bond market.” He shorted companies that originated subprime loans, like New Century and Indy Mac, and companies that built the houses bought with the loans, such as Toll Brothers. Smart as these trades proved to be, they weren’t entirely satisfying. These companies paid high dividends, and their shares were often expensive to borrow; selling them short was a costly proposition.

Enter Greg Lippman, a mortgage-bond trader at Deutsche Bank. He arrived at FrontPoint bearing a 66-page presentation that described a better way for the fund to put its view of both Wall Street and the U.S. housing market into action. The smart trade, Lippman argued, was to sell short not New Century’s stock but its bonds that were backed by the subprime loans it had made. Eisman hadn’t known this was even possible—because until recently, it hadn’t been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision.

Here’s where financial technology became suddenly, urgently relevant. The typical mortgage bond was still structured in much the same way it had been when I worked at Salomon Brothers. The loans went into a trust that was designed to pay off its investors not all at once but according to their rankings. The investors in the top tranche, rated AAA, received the first payment from the trust and, because their investment was the least risky, received the lowest interest rate on their money. The investors who held the trusts’ BBB tranche got the last payments—and bore the brunt of the first defaults. Because they were taking the most risk, they received the highest return. Eisman wanted to bet that some subprime borrowers would default, causing the trust to suffer losses. The way to express this view was to short the BBB tranche. The trouble was that the BBB tranche was only a tiny slice of the deal.

But the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.

The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. “What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’”

And short Eisman did—then he tried to get his mind around what he’d just done so he could do it better. He’d call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”

The End of Wall Street (By Michael Lewis) 3/7

2009-04-11T08:47:00.000-07:00

[In the next 7 postings I'm going to publish an article from Michael Lewis in Nov 11, 2008 in Portfolio.com]

Steve Eisman entered finance about the time I exited it. He’d grown up in New York City and gone to a Jewish day school, the University of Pennsylvania, and Harvard Law School. In 1991, he was a 30-year-old corporate lawyer. “I hated it,” he says. “I hated being a lawyer. My parents worked as brokers at Oppenheimer. They managed to finagle me a job. It’s not pretty, but that’s what happened.”

He was hired as a junior equity analyst, a helpmate who didn’t actually offer his opinions. That changed in December 1991, less than a year into his new job, when a subprime mortgage lender called Ames Financial went public and no one at Oppenheimer particularly cared to express an opinion about it. One of Oppenheimer’s investment bankers stomped around the research department looking for anyone who knew anything about the mortgage business. Recalls Eisman: “I’m a junior analyst and just trying to figure out which end is up, but I told him that as a lawyer I’d worked on a deal for the Money Store.” He was promptly appointed the lead analyst for Ames Financial. “What I didn’t tell him was that my job had been to proofread the documents and that I hadn’t understood a word of the fucking things.”

Ames Financial belonged to a category of firms known as nonbank financial institutions. The category didn’t include J.P. Morgan, but it did encompass many little-known companies that one way or another were involved in the early-1990s boom in subprime mortgage lending—the lower class of American finance.

The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. “I put a sell rating on the thing because it was a piece of shit,” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should.” He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style. Upbeat and Eisman didn’t occupy the same planet. A hedge fund manager who counts Eisman as a friend set out to explain him to me but quit a minute into it. After describing how Eisman exposed various important people as either liars or idiots, the hedge fund manager started to laugh. “He’s sort of a prick in a way, but he’s smart and honest and fearless.”

“A lot of people don’t get Steve,” Whitney says. “But the people who get him love him.” Eisman stuck to his sell rating on Lomas Financial, even after the company announced that investors needn’t worry about its financial condition, as it had hedged its market risk. “The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.

Eisman wasn’t, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. “You have to understand,” Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a shit what it sold.”

Harboring suspicions about people’s morals and telling investors that companies don’t deserve their capital wasn’t, in the 1990s or at any other time, the fast track to success on Wall Street. Eisman quit Oppenheimer in 2001 to work as an analyst at a hedge fund, but what he really wanted to do was run money. FrontPoint Partners, another hedge fund, hired him in 2004 to invest in financial stocks. Eisman’s brief was to evaluate Wall Street banks, homebuilders, mortgage originators, and any company (General Electric or General Motors, for instance) with a big financial-services division—anyone who touched American finance. An insurance company backed him with $50 million, a paltry sum. “Basically, we tried to raise money and didn't really do it,” Eisman says.

Instead of money, he attracted people whose worldviews were as shaded as his own—Vincent Daniel, for instance, who became a partner and an analyst in charge of the mortgage sector. Now 36, Daniel grew up a lower-middle-class kid in Queens. One of his first jobs, as a junior accountant at Arthur Andersen, was to audit Salomon Brothers’ books. “It was shocking,” he says. “No one could explain to me what they were doing.” He left accounting in the middle of the internet boom to become a research analyst, looking at companies that made subprime loans. “I was the only guy I knew covering companies that were all going to go bust,” he says. “I saw how the sausage was made in the economy, and it was really freaky.”

Danny Moses, who became Eisman’s head trader, was another who shared his perspective. Raised in Georgia, Moses, the son of a finance professor, was a bit less fatalistic than Daniel or Eisman, but he nevertheless shared a general sense that bad things can and do happen. When a Wall Street firm helped him get into a trade that seemed perfect in every way, he said to the salesman, “I appreciate this, but I just want to know one thing: How are you going to screw me?”

Heh heh heh, c’mon. We’d never do that, the trader started to say, but Moses was politely insistent: We both know that unadulterated good things like this trade don’t just happen between little hedge funds and big Wall Street firms. I’ll do it, but only after you explain to me how you are going to screw me. And the salesman explained how he was going to screw him. And Moses did the trade.

Both Daniel and Moses enjoyed, immensely, working with Steve Eisman. He put a fine point on the absurdity they saw everywhere around them. “Steve’s fun to take to any Wall Street meeting,” Daniel says. “Because he’ll say ‘Explain that to me’ 30 different times. Or ‘Could you explain that more, in English?’ Because once you do that, there’s a few things you learn. For a start, you figure out if they even know what they’re talking about. And a lot of times, they don’t!”

The End of Wall Street (By Michael Lewis) 2/7

2009-03-11T08:46:00.000-07:00

[In the next 7 postings I'm going to publish an article from Michael Lewis in Nov 11, 2008 in Portfolio.com]

Whitney was an obscure analyst of financial firms for Oppenheimer Securities who, on October 31, 2007, ceased to be obscure. On that day, she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It’s never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Four days later, Citigroup’s C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.

From that moment, Whitney became E.F. Hutton: When she spoke, people listened. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale. The vast assemblages of highly paid people inside the firms were essentially worth nothing. For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.

Rivals accused Whitney of being overrated; bloggers accused her of being lucky. What she was, mainly, was right. But it’s true that she was, in part, guessing. There was no way she could have known what was going to happen to these Wall Street firms. The C.E.O.’s themselves didn’t know.

Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.

At some point, I could no longer contain myself: I called Whitney. This was back in March, when Wall Street’s fate still hung in the balance. I thought, If she’s right, then this really could be the end of Wall Street as we’ve known it. I was curious to see if she made sense but also to know where this young woman who was crashing the stock market with her every utterance had come from.

It turned out that she made a great deal of sense and that she’d arrived on Wall Street in 1993, from the Brown University history department. “I got to New York, and I didn’t even know research existed,” she says. She’d wound up at Oppenheimer and had the most incredible piece of luck: to be trained by a man who helped her establish not merely a career but a worldview. His name, she says, was Steve Eisman.

Eisman had moved on, but they kept in touch. “After I made the Citi call,” she says, “one of the best things that happened was when Steve called and told me how proud he was of me.”

Having never heard of Eisman, I didn’t think anything of this. But a few months later, I called Whitney again and asked her, as I was asking others, whom she knew who had anticipated the cataclysm and set themselves up to make a fortune from it. There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria—to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded—without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney rattled off a list with a half-dozen names on it. At the top was Steve Eisman

The End of Wall Street (By Michael Lewis) 1/7

2009-02-11T08:45:00.000-08:00

[In the next 7 postings I'm going to publish an article from Michael Lewis in Nov 11, 2008 in Portfolio.com]

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

When I sat down to write my account of the experience in 1989—Liar’s Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.

Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”

I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.

Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.

In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

At some point, I gave up waiting for the end. There was no scandal or reversal, I assumed, that could sink the system.

What Is It You Plan To Do With Your One Wild and Precious Life? (By Jorge Robers)

2009-01-11T07:15:00.000-08:00

A 7-year old boy stands on his grandmother's balcony with the Mexican flag across his chest while he imagines he the president delivering a speech to millions of people. For the rest of his life he wants to have:

Courage to stand up to those who prefer the dinosaur than to undertake the pains of democracy,

Fortitude to be an honest public servant and not listen to Socrates who once said "too honest to be a politician and live,"

Humility to learn from people without a Harvard MBA,

Passion for his job as his abuelo and mother had for pulling out teeth,

Curiosity to ask the same questions the Labyrinth of Solitude once tried to answer,

Maturity and discipline to run an ultramarathon like the Tarahumara Indians,

Wind to sail the oceans that his grandfather and father once sailed,

Luck to capture the perfect photo as his father once did,

Gallantry as his father showed when he fought in World War II,

Energy to wake up at six o'clock to care for his baby girl, so his wife can go to the gym,

Inspiration for his daughter so she can find her little girl on the balcony,

Acceptance of his daughter's own speech and choice of balcony,

Hope that one day the children of Mexico's lost cities and forgotten towns can also find their own boy on the balcony,

Leisure to read Le Petit Prince to teach his daughter that the "eyes are blind and that one must look with the heart,"

Everyday I want to remember that I am that boy as I stand on the balcony regardless of the weather outside.

– Jorge S. Roberts
http://www.hbs.edu/mba/profiles/PortraitProject/2007portrait/RobertsJorge.html

Chesterfield Group (Continuacion)

2008-12-11T08:35:00.000-08:00

En mi ultimo escrito describia el fraude de una supuesta carta del Chesterfielf Group. Quiero dejar en claro que confirme que es un fraude y quien escribio esta carta es un farsante.

Financial Institution Scam / Fraude con Institucion Financiera

2008-11-11T06:01:00.000-08:00

[Este comentario esta escrito en ingles y en español. Abajo en español]

[This note is written in both spanish and english]

Incredible enough I received last week a letter that promise me some compensation if I contacted a person at a financial institution. The promise is pretty simple. The scammer says that he has an account under my same last name. That the accountholder died and nobody has moved the money so the scammer wants to work with me to get the account close and the money out. I believe how this scam works is that the scammer promises different things and then asks you to send some money back for his 'share' of the pie. In my case the institution that the scammer used was the Chesterfield Group in the United Kingdom and the name of the person is Christopher Moran.

[Attached the letter that you received in the mail that is a scam]

Interestantemente la semana pasada recibi una carta de un señor que me promete un dinero si lo contacto. Este señor supuestamente trabaja en una institucion financiera. El señor me dice que tiene una cuenta en su institucion bajo el nombre de una persona con mi mismo apellido. Que el dueño de la cuenta se murio y el dinero quedo abandonado. Que si lo contacto podemos hacer algo para sacar ese dinero. Creo que el fraude funciona de la siguiente manera. El señor dice que hace todos los tramites. Luego le pide a uno que le envie dinero directamente de mi cuenta para pagar por los tramites. En mi caso la institucion financiera que utilizaron fue el Chesterfield Group en el Reino Unido y el nombre del supuesto señor es Christopher Moran.

[Adjunto la carta que me llego]

Se derrumba la confianza

2008-10-11T00:00:00.000-07:00

Una de las caracteristicas fundamentales del exito estado unidense en terminos economicos ha sido la confianza. Un tema que fue explicado muy ampliamente por Francis Fukuyama en su libro 'Trust: The Social Virtues and The Creation of Prosperity' (Confianza). La confianza es algo que disminuye costos de transaccion y permite que el dinero y las inversiones se muevan mas rapido.

La confianza en Wall Street fue una de las causas de su colapso esta semana que paso. La confianza de corredoras y banqueros de aceptar papeles de dudosa reputacion. Algunas excusas que salen a la luz es que los paquetes hipotecarios que fueron comprados por estos bancos eras una mezcla de papeles buenos y malos. Otra excusa es que eran papeles (derivadas de creditos) muy complejos para ser valorados perfectamente.

Aun asumiendo que estas excusas son veridicas para todos los casos (que no lo creo), uno puede decir que la confianza jugo un papel supremamente importante al aceptar este riesgo sin ningun tipo de precaucion. Los banqueros en Wall Street (y el mundo) comenzaron a tranzar y disectar papeles que no conocian a la perfeccion. Se basaron en una cadena de confianza para librarse de la responsabilidad de indagar mas a fondo.

Bancos como Goldman Sachs y Morgan Stanley lideraron una nueva era donde utilizando su audacidad y tecnologia comenzaron a disectar papeles pero al final se dieron cuenta que el metodo de valoracion no era tan simple. Es dificil valorar algo al cual uno no conoce bien. EStos papeles tan complejos dependen mucho de la volatilidad, algo parecido a una opcion (calls/puts). Lo dificil de estos papeles es que no tienen la informacion necesaria de varios años para valorar que tipo de volatilidad tiene el activo que respalda el papel.

En el caso de las opciones sobre acciones, uno piensa que conoce el tipo de volatilidad del activo sujeto simplemente porque conoce el precio de las acciones por años de años. En el caso de estos papeles de renta fija es un poco mas complejo. Cada papel es diferente a otro por lo que uno no conoce el riesgo intrinsico. Adicionalmente ciertos tipos de papel no han sido tranzados en bolsa nunca (solo "Over the counter"), otro solo por unos años.

Obviamente que este es solo un factor del derrumbe de las bolsas y la economia estadounidense. Primero se derrumbaron los precios de los bienes raices. Con la ayuda de los CDOs derrumban las acciones de instituciones financieras. Luego los problemas de la capitalizacion de muchas compañias. Luego se derrumban las calificaciones de riesgo. Luego los papeles de renta fija de las instituciones financieras. El sistema se vuelve iliquido afectando el resto de la economia. Todo el mercado se ve afectado y el resto de las acciones se derrumban. Se pierden millones de dolares en pensiones e inversiones del resto de personas no involucradas en Wall Street. Con esto se pierde la confianza del consumido comun. Sin confianza (sin consumo) el resto de la economia se desbarata.

Ahora estamos en un dilema. Por un lado la gente no consume porque ve que el proximo año va a ser tenaz. Por el otro lado se necesita de consumo para que las compañias sobrevivan. Sin consumo las compañias no fabrican. Sin fabrica no hay necesidad del empleado. Con desempleo se genera mas recesion y mas desconfianza. La gente ahorra mas y no consume y comienza nuevamente el ciclo vicioso.

Ahora si que nos salve Mandrake.

Don't blame the oil 'speculators'

2008-07-01T06:50:00.000-07:00

[Interesantemente despues del ultimo articulo que les mostre quede mas intrigado con el movimiento del congreso estadounidense por tratar de controlar la especulacion en el mercado de derivados del petroleo. Hoy me cruze con este articulo que aqui les comparto]

A campaign in Congress to punish traders for record oil prices reveals a fundamental misunderstanding of how futures markets work.

By Jon Birger, senior writer
Last Updated: June 27, 2008: 9:11 AM EDT

NEW YORK (Fortune) -- "Make no mistake about it," U.S. Rep. Bart Stupak, D-Mich., said Monday while chairing a meeting of the House Energy and Commerce subcommittee on Oversight and Investigations. "Excessive speculation in commodity markets is having a devastating effect at the gas pump that is rippling through our entire economy."
Here's a suggestion: The next time a Congressional committee wants to hold a hearing on how "speculators" are driving up oil prices, each committee member should first be required to demonstrate - preferably in their opening remarks - a basic understanding of the mechanics of futures trading.

Even better, they should be required to explain in detail how it is that investors who never take delivery of a single barrel of crude - and thus never remove a drop of oil from the open market - are causing record high oil prices.

If there were such a requirement, I guarantee we'd never again see a circus like the one Stupak presided over Monday.

"Do I think [Washington politicans] understand the role of futures markets - how they facilitate price discovery and the transference of risk?" asks former U.S. Commodities Futures Trade Commission chief economist Gerald Gay. "No, they're clueless - at least most of them."
Bad public policy

If our representatives did understand the oil markets, they'd know that the true telltale sign of a speculative bubble is not rising trading volumes but rising oil inventories. Speculators would be hoarding oil - building up inventories either in anticipation of higher prices or as part of a scheme to drive prices there. Yet according to the Department of Energy, U.S. oil inventories are now at below-average levels. U.S. oil stocks stand at 309 million barrels, versus 330 million in June 2005.

So far, lawmakers have introduced nine different bills targeting oil speculators, though for the most part their prescriptions have been milder than their over-the-top rhetoric .
Bashing futures traders may well be good politics, but it's stupid public policy. By providing a mechanism for locking in prices, the futures market makes it easier for oil companies to make costly investments in new production - which is the key to lowering prices at the pump.
Futures trading also discourages hoarding in an otherwise tight market. Without speculators willing to take the other side of so many futures contracts, oil refiners and other end-users might be inclined to ramp up their spot-market purchases and store more oil as a hedge against further price increases.

And, of course, any increased draw on current supplies would lead to even higher oil and gasoline prices. Indeed, without a futures market, I believe we'd be decrying oil at $200 a barrel oil instead of oil at $135.

A more basic misconception in Washington involves what these so-called speculators are really buying. They're not buying oil, they're buying futures, and this is a crucial distinction. A futures contract is an agreement between a buyer and a seller to deliver a set amount of oil - typically 1,000 barrels - at a specific price on a specific date. The value of that contract rises and falls, depending upon market conditions, right up until the date of delivery.

Thing is, the pension funds, index funds, hedge funds and other so-called speculators almost never take delivery of any oil. The typical investment fund will buy, say, the August oil future and then sell it days before it comes due - typically rolling over the proceeds into the next month's contract.

"For speculators to be propping up the price of oil, they somehow have to be taking physical oil off the market," says energy markets expert Craig Pirrong, a finance professor at the University of Houston's Bauer College of Business.

Pirrong points out that when the federal government decided to bolster cheese prices in the 1970s, it did so by purchasing warehouses full of cheese and keeping it off the market. "Well, where's the cheese now?" Pirrong asks. "Where's all the oil that the speculators have held off the market?"

Even if you believe there's no way that oil trading volumes could be soaring without influencing oil prices, remember that influence then has to run two ways.

If an index fund is indirectly driving up spot oil prices every time it buys a future, then the converse must be true, too - there must be an equal and opposite downward push on spot prices every time that future is sold. In other words, futures market critics can't have it both ways.
There's something else politicians conveniently overlook: futures trading requires two to tango. For every investor who is betting oil prices will go up, there also needs to be an investor willing to take the opposite side of that bet.

In the past, there have been times when the overwhelming majority of speculators were "longs" betting on higher prices, while their commercial-trader counterparts - i.e. traders working for oil refiners, airlines, and other end-users of oil - were the "shorts" betting prices would fall.
But as New York Mercantile Exchange Chairman James Newsome explained to Stupak's Congressional committee, today's speculators are evenly split between shorts and longs. Moreover, the percentage of futures contracts held by speculators (as opposed to commercial traders) "actually decreased over the last year," Newsome told the subcommittee, "even at the same time that [oil] prices were increasing."

It's time to find a new scapegoat. My own nominee: Congress. But that's another column.
Your voice: Is Birger right? Tell us what you think.

First Published: June 27, 2008: 8:30 AM EDT

Oil Bubble

2008-06-11T23:59:00.000-07:00

[Recientemente he pensado mucho sobre lo que se discute en el mercado respecto al 'oil/commodity bubble'. Es un tema relativamente interesante y probablemente un poco complejo. Por esa razon me encanto cuando un amigo me envio el siguiente articulo que explica un poco la interaccion entre derivados y spot prices]

Econbrowser: Oil bubble (May 17, 2008)

How speculation may be contributing to the most recent moves in oil prices.
An important recent trend in management of pension and hedge funds is the increasing allocation of investment dollars to commodity speculation. There are lots of ways you can do this. Perhaps the simplest is to purchase, say, the July NYMEX oil futures contract. If you'd bought that contract Friday, it would enable you to take delivery of oil in Cushing, Oklahoma some time in July for $126/barrel. As a pension fund, you don't actually want to receive that oil, so in early June you'd plan on selling that contract to someone else and using the proceeds to buy the August contract. If oil prices go up and you can sell the contract for more than $126/barrel next month, you will have made a profit. By rolling over near-term futures contracts in this way, your "investment" will earn a return that follows the path of oil prices.

For the rest go to: http://www.econbrowser.com/archives/2008/05/oil_bubble.html

Commodity Bubble

2008-05-11T23:59:00.000-07:00

Billionaire George Soros said the boom in commodities is still in a "growth phase'' after prices for oil, wheat and gold rose to records."You have a generalized commodity bubble due to commodities having become an asset class that institutions use to an increasing extent,'' Soros said today at an event sponsored by the Centre for European Policy Studies in Brussels. "On top of that you have specific factors that create the relative shortage of oil and, now, also food.''Commodities are in their seventh year of gains, with oil rising to a record $115.54 a barrel today as the dollar plunged to an all-time low against the euro. Rice has more than doubled in a year, while corn has advanced 68 percent and wheat 92 percent. Investments in commodities rose by more than a fifth in the first quarter to $400 billion, Citigroup Inc. said April 7 . . . Soros's comments echo those of Jim Rogers, a fellow founder of the Quantum Hedge Fund in the 1970s. Rogers is best known for being a commodities bull since the late 1990s, before the market started to rally in 2001. His Rogers International Commodity Index has more than quadrupled since its start in 1998.
Taken from: http://bigpicture.typepad.com/comments/2008/04/soros-says-comm.html

FARC Article in the WSJ

2008-04-11T00:00:00.000-07:00

A FARC Fan's Notes
March 25, 2008; Page A22

A hard drive recovered from the computer of a killed Colombian guerrilla has offered more insights into the opposition of House Democrats to the U.S.-Colombia Free Trade Agreement.

A military strike three weeks ago killed Raúl Reyes, No. 2 in command of the FARC, Colombia's most notorious terrorist group. The Reyes hard drive reveals an ardent effort to do business directly with the FARC by Congressman James McGovern (D., Mass.), a leading opponent of the free-trade deal. Mr. McGovern has been working with an American go-between, who has been offering the rebels help in undermining Colombia's elected and popular government.

Complete article at: The Wall Street Journal

FARC Article in The New York Times

2008-03-11T00:00:00.000-07:00

March 30, 2008
Files Suggest Venezuela Bid to Aid Colombia Rebels
By SIMON ROMERO

BOGOTÁ, Colombia — Files provided by Colombian officials from computers they say were captured in a cross-border raid in Ecuador this month appear to tie Venezuela’s government to efforts to secure arms for Colombia’s largest insurgency.

Officials taking part in Colombia’s investigation of the computers provided The New York Times with copies of more than 20 files, some of which also showed contributions from the rebels to the 2006 campaign of Ecuador’s leftist president, Rafael Correa.

If verified, the files would offer rare insight into the cloak-and-dagger nature of Latin America’s longest-running guerrilla conflict, including what appeared to be the killing of a Colombian government spy with microchips implanted in her body, a crime apparently carried out by the rebels in their jungle redoubt.

The files would also potentially link the governments of Venezuela and Ecuador to the leftist guerrillas of the Revolutionary Armed Forces of Colombia, or FARC, which the United States says is a terrorist group and has fought to overthrow Colombia’s government for four decades.

Complete Article at: The New York Times

Facebook: Democracy 2.0

2008-02-11T00:00:00.000-08:00

Mauricio Ardila
March 5, 2008

(AP Images)

On January 4, 2008, a small group of friends created a Facebook group whose sole purpose was to promote a peaceful, non-partisan march in Colombia to stand up against the Revolutionary Armed Forces of Colombia (FARC). What these unsuspecting individuals had not counted on was the massive, worldwide response their message would elicit.

Exactly one month later, millions of people around the world marched in 163 cities, from Washington to Dubai, to call for an end to this terrorist organization. According to police estimates, in Colombia alone, an estimated 4.8 million people turned out for 387 different events.

This unprecedented mobilization was lauded because of its universal message and its ability to bring together a worldwide protest of concerned individuals. Facebook, the social network utility site, is often used as a tool for raising awareness of global issues and collecting donations for numerous non-profit organizations. However, the momentum and outcry of the February 4 events were unparalleled.

More impressive than the size of the march was its humble origins. Soon after creation of the Facebook group, inquiries started pouring in from around the world, some to request information, others to offer gestures of support. Within weeks, complete strangers had formed a worldwide logistics network using Facebook, email, websites, blogs, and Skype, an Internet-based phone service.

Coincidentally, three days after the march, Facebook, with more than 2.8 million active users in Latin America and Spain, launched a Spanish platform—the first step in internationalizing the site. Like the anti-FARC march, users—almost 1,500—took the lead in ushering in the change. Working across borders, people of all ages translated the site in less than four weeks, with the top translator responsible for 3 percent of the new Spanish content.

Democracy is defined as “a form of government in which the supreme power is vested in the people.” If Facebook can serve as a means to make a person’s voice heard then it and other networks should be recognized as a tool of democracy.

The face of the Internet hardly resembles that of 10 years ago. Originally dubbed the “information superhighway,” the Internet has evolved into far more than just a source for information, giving birth to new, virtual communities. Many of these communities, such as gaming centers, file sharing networks, blogs, and forums, can, in part, attribute success to allowing individual web presence to remain completely anonymous. Facebook, on the other hand, puts a real identity and “face” to its users, helping it to function as a democracy-spreading arsenal.

As evidenced by the February 4 march, the Internet can play an important role in helping to engage entire populations at a time—a feat unimaginable just a few years ago. Critics may say the demonstrations were initiated by a small, elite group with exclusive access to the Internet. However, Facebook and other social networking sites are free and globally available.

For social networking to become a true tool of democracy, we must boost the number of people with access to the Internet. From 2000 to 2005, the number of Internet users in Latin America jumped from 3.8 percent to 15.6 percent of the population. Nonetheless, we still have a long way to go. Without access, participation in this new age remains a distant goal.

Mauricio Ardila studies international business at George Washington University and works part-time at the Council of the Americas in Washington, DC.

A Million Bucks by 30

2008-01-11T00:00:00.000-08:00

by Frugal Trader (Million Dollar Journey)

Alan Corey, young author and millionaire, contacted me after visiting MDJ one day. He told me about his story/book where he set a big financial goal at the age of 22 to become a millionaire before the age of 30. Not only did he reach his goal on average income (below average in NYC), he did it before the age of 29.

He didn't win the lottery, have a high salary job, or an inheritance. When it comes down to it, Alan Corey's success evolved from his frugality, bargain hunting real estate investing style and his bigger than life determination.

Some people will finish the book and say that Alan Corey was lucky to have hit the real estate jackpot in his transactions. It's true that luck may have had some part of it, but the sheer desire and drive to be a millionaire is what really made this young fellow succeed.

Who is Alan Corey?

Alan Corey is a regular guy who graduated with a business degree who had big aspirations to be a millionaire before the age of 30. He admits in the book that "he's not particularly good at anything" but he has the drive to save and make money. I know that I'm frugal, but I spend money like Michael Jackson compared to Alan Corey. He cut his expenses so much that he lived on 29% of his gross salary (in NYC) which was $40k at the time.

What are the main points made by the book?

The book is a true story of how Alan Corey became a millionaire before his 29th birthday by simply making a goal for himself, and sticking to it regardless of the sacrifices he had make along the way.
Alan Corey's method of obtaining wealth is extreme frugality, investing the saved money in equities and real estate. Most of his wealth was made from real estate transactions of his primary residences. Alan Corey has a keen eye for "up and coming" neighborhoods, which made up a bulk of the cash he made along his journey.
His smartest moves in my opinion were buying houses in an up and coming neighborhoods, renting out the "good/high income" rooms while keeping the "bad/low income" room to live in himself.

What I liked?

I enjoyed the frugal tips highlighted throughout the book
I respect that Alan Corey describes every frugal technique that he could think of to reduce his expenses to next to nothing.
I enjoyed reading about his challenges and the risks that he took (borrowing from family/friends) to secure his real estate transactions. He's a model for the old saying "No Risk/No Reward".

What I didn’t like?

Even though Alan Corey implemented an extremely frugal lifestyle, I didn't agree with some of his highlighted frugal strategies. For example, creating a fake magazine company just to get concert tickets isn't ethical in my books, but to each their own.

Final Thoughts:

I personally really enjoy reading success stories of young people achieving their goals through determination and hard work. Once I started reading, I couldn't put the book down and finished the book the same night. I would recommend "A Million Bucks by 30" to everyone for it's entertainment and financial value.

For those who have read the book, I've been in contact with Alan Corey recently and yes the millionaire still lives in the cramped, windowless closet he calls a bedroom. Nope, he's not letting his cash savings go to waste, he's currently working on other real estate deals.

Source: http://www.milliondollarjourney.com/book-review-a-million-bucks-by-30.htm

Google Analysis (Part 4/4) by Ana V. Ricaurte

2007-12-11T00:00:00.000-08:00

GOING AFTER THE NEXT BIG THING

Google has still too much to worry about. With growth CAGR of +100% it needs to keep improving every day and penetrating additional markets every second.

To obtain such an audacious goal, Google has several strategy, two of the main strategies are: (a) Penetrating China, and (b) Expanding its service to the Mobile arena.

Developing Economies Strategy - China Penetration

For Google the developing markets are very different from what they are used to in the US and UK. Given that paid search in the international markets is immature, Google needs to change the name of the game.

For example in China, Google needs more than just a CPA strategy. Google have been playing in the China market since it established a Chinese-language version in 2000. Nevertheless Google have had great problems with its services in China.

Chinese government have put in place since the inception of the industry era in China, a technological “firewall” that restricts access to prohibited or banned information.

The government provided a blacklist of banned IP addresses and URLs featuring information and news about politically or culturally sensitive topics and required operators to block access to them. Users who attempted to access blocked sites would receive a non-specific error message, such as “the page cannot be displayed.” [i]

Google services has been affected by this firewall that impede its systems to run smoothly. On the contrary it services seems erratic and poorly managed, given space for local competitors.

Google’s own research showed that the company was perceived in China as an international brand and technology leader, but “a little distant to average Chinese users.” More than half of Internet users who knew about Google could not spell the name correctly, and more than half thought the company should have a Chinese name. By contrast, Baidu was perceived as being a Chinese brand with good technology, “friendly,” “closer to average Chinese people’s life,” and as having entertainment products. [ii]

Given that Google do not work closely with the Chinese government on terms of internet censorship, Badu –Google’s top competitor and local player in China— that does work closely with the Chinese government has been able to capture most of the Chinese market.

Baidu works with the government more closely than other search companies. Baidu launched a more aggressive system to censor their key words. They started to censor their search service earlier and more extensively than others. That’s why the government likes Baidu.xⁱ

In this case Google has two possibilities. (a) Follow Baidu game book and work with the Chinese government to censor its services from the beginning, and (b) Improve its search services inside China and extend its entertainment service to target China heavy internet users.

For China as well as for other developing countries, Google needs to change the name of the game. On one side Google needs more traffic and on the other side it needs to improve its monetization of this services. To attract more traffic to its Chinese search engine it needs to provide a more extensive service. To better monetize it services it needs to change the way it does business with advertisers (to overcome the immature online advertising market)

An analogy to the problem that Google faces in the developing economies where the paid online advertising market is still immature is what happened in the mobile phone industries more than a decade ago. When penetrating new markets mobile phone service providers changed the way they provide services. In the U.S. it is accustom that both receivers and callers pay for the mobile phone service. This idea never worked outside the U.S. It was too expensive just to carry a mobile phone per se that to have the user pay for the receiving calls it was unconceivable. In Europe and some developing economies the caller is the one that pays for the call. In Europe and Latin America, mobile phone service providers were really successful at penetrating the market when they changed the name of the game. Something similar has to occurred with the online advertising market in developing markets. I believe that advertisers in developing economies would wait until a successful CPA effective cost per action) platform is functioning to fully participate in this online industry. Until then you are going to see an ‘inmature’ industry in these regions.

An step towards changing the name of the game was the partnership that Google signed with Western Union in November 2007.

The Western Union Co. announced a program that allows Google AdSense(TM) Website publishers to receive payment in cash in nine countries via the Western Union Quick Cash®service. The Google AdSense advertising program enables Website publishers to serve Google AdWords(TM) text, image and video ads that are precisely targeted to their Website's content. When visitors to the site click on the ad, the AdSense publisher earns revenue. Before the launch of this program, Website publishers using Google's AdSense program received payment through paper check or electronic funds transfer (EFT) into a bank account[1].

Developed Economies - Mobile Focus

Google strategy in developed countries should focus on expanding its technology to new channels. One particular channel that I believe would be the future is the mobile space. I’m not talking only about cell phones but anything that would be describe as mobile (i.e. PDAs, portable game consoles, smartphones, etc).

Few analysts believe that the mobile focus would bring big advertising dollar for Google. The street believes that the big ad dollar would come from Google’s penetration to traditional media (TV, Printed and Radio). On the contrary I believe that the advertising market would continue to shift away from traditional media towards new media.

Forrester’s 2005 Benchmark Study, although consumers spend 32% of their time on the Internet, advertisers currently only spend 7% of all ad dollars on online advertising. Google believe that over time, this gap should shrink, with more dollars continuing to move online where consumers are. The parallel increase in the number of Internet users with broadband connections will also help stimulate growth and demand for online advertising. Much of the growth in the coming years is expected to come from the emerging markets regions as the online advertising market is relatively more mature in the United States and Western Europe.[2]

Google has recently focus on acquiring or developing a mobile platform that allows them to capture this new nascent market. In recent weeks, Google announced the world that it is going to release its own mobile platform in 2008 and it is already seeking partnership with wireless operators. The Google mobile platform (Android) would make Google applications and services as easily accessible on mobile phones as PCs, allowing Google to capture more ad business from the more than three billion users of cell phones and other wireless devices. On top of that other companies (e.g. Artificial Life Inc) have announced plans to develop games and applications for Android.

Interesting enough this new platform would be less costly than others (i.e. iPhone), attracting new opportunities for low cost providers and new solutions for developing countries. Google anticipates that this emerging platform will soon attract handset manufacturers because of the lower costs for the operating system and expects Android to be successful especially in China due to its Linux base.

Google is also exploring other alternatives to improve its mobile platform:

v Google has also developed plans to acquire mobile phone spectrums in both the U.S. and the U.K.

v Acquired (Oct 2007) Jaiku that operates as a conversational microblogging community that enables users to post thoughts from Web and mobile applications, and comment on the posts of friends and family.

v Acquired (Sep 2007) Zingku that provides mobile text and picture messaging services.

v Acquired (July 2007) GrandCentral Communications that provides a Web-based voice communications platform to manage phones and phone numbers.

v Developing (Nov 2007) a technology that will find the location of people using its mobile mapping service, even if the phone making the connection isn't equipped with a GPS receiver.

CONCLUSION

Google needs to constantly innovate and growth to be able to manage its investors expectations. The new goal in the future would be its expansion to the mobile and traditional media platforms, and its path to penetrate new markets (China being the most relevant of all those).

It seems that Google is accomplishing in each step of the way the relevant milestone to fulfill this audacious goal of organizing the information of the world. Only time will tell.

[1] Capital IQ News Run

[2] Google Inc. HBS Case 9-806-105 by Thomas R. Eisenmann and Kerry Herman (Nov 9, 2006)

[i] Google – Figuring Out How To Deal With China. Babson Case BAB131 by Anne T. Lawrence (August 2007)

[ii] Google – Figuring Out How To Deal With China. Babson Case BAB131 by Anne T. Lawrence (August 2007)

Google Analysis (Part 3/4) by Ana V. Ricaurte

2007-11-11T00:00:00.000-08:00

OVERALL STRATEGY

Google strategy can be describe in five main efforts:

v Market Strategy – Differentiate product and service with high quality, accessibility and easy-to-use motto

v Innovation Strategy – Create the best technology available to perform the best service out there (i.e. PageRank)

v Human Capital Strategy – Bring the best of the best to create a knowledge base that can preserve the level of innovation necessary to continue serving its clients with the best products/services

v Management Strategy - Create flat structure (anti-bureaucracy) that fosters cooperation, flexibility and fast pace

v Don’t Be Evil Strategy – Create an environment where people love to do the ‘the right thing’

BUSINESS TRENDS[i]

Top Line Related

Google top line growth in the past 5 years has mainly come from Developed Economies. In the future, Google expects that a big portion of its top line growth would be related to current offerings in Developing Economies (i.e China) and to the Mobile Platform in Developed Countries.

The growth in international revenues in the three and nine months ended September 30, 2007 compared to the three and nine months ended September 30, 2006 resulted largely from increased acceptance of Google advertising programs, increases in Google direct sales resources and customer support operations in international markets and Google continued progress in developing localized versions of its products for these international markets. [ii]

Domestic and international revenues as a percentage of consolidated revenues, determined based on the billing addresses of its advertisers, are set forth below: [iii]


	Year Ended December 31,						Nine Months Ended
	2004		2005		2006		September 30, 2006		September 30, 2007
United States	66	%	61	%	57	%	57	%	53	%
United Kingdom	13	%	14	%	15	%	15	%	16	%
Rest of the world	21	%	25	%	28	%	28	%	31	%

Besides the increase in revenues from international sources, Google U.S. region has been affected by the relative weakening of the U.S. dollar. Nevertheless, it is clear from the online traffic numbers that the future of Google resides outside the U.S. While international revenues in each of the periods presented accounted for less than half of Google total revenues, more than half of its user traffic during these periods came from outside the U.S. [iv]

Another recent trend that could potentially affect Google’s top line and margin is the debate between Cost-per-Action (CPA) vs. Cost-per-Click. Where cost-per-click means someone pays Google (or another entity) each time a user clicks on a particular piece of advertising, cost-per-action means that someone pays when a user completes a potentially larger and more involved transaction[1]. Advertisers will migrate in the future to CPA models, in that scenario Google not only has to guarantee that its ads are well targeted but also guarantee that the user would take action.

Margin Related

When advertising dollars go through the Google Network (user-owned website), Google needs to share the ad revenue with them. For that reason it is more profitable if the ad dollars go through Google-owned websites. Since the beginning of the Google Network in 2002 through the first quarter of 2004, the growth in advertising revenues from its Google Network members’ web sites exceeded that from Google-owned web sites. Beginning in the second quarter of 2004 this changed, growth in advertising revenues from Google-owned web sites exceeded that from Google Network members’ websites. i

INDUSTRY OVERVIEW & COMPETITIVE LANDSCAPE

Google potentially competes with nearly every company in the information technology industry. The problem for companies outside the advertising world is that Google for the most part doesn’t compete for part of the business (i.e. revenues), it competes for what I call ‘purpose’ (maybe purpose that can be later monetize). Google is not planning to charge for some services or products. It seems that it wants to expand its platform and later develop a way of monetizing its reach.

For ‘purpose’, Google has a product that quasi-competes with Microsoft Office (i.e. Docs & Spreadsheets), a product that kind of competes against eBay or Amazon (i.e. Froogle), a product that competes against Mapquest (Google Maps), Snapfish and Kodak Photos (Picasa), Cable providers (Google Video and YouTube), and Free email providers (Gmail). For revenues, Google competes head to head with Yahoo! and Microsoft. These three mega players (Google-$215B in market cap, MSFT-$315B and YHOO-$35B) seemed lock in arm race to obtain part of the advertising budget.

On top of that, Google could also be a future competitor to other media companies (i.e. cable providers, TV channels, newspapers, radio station, etc). Google has been constantly exploring how to expand to other media channels without any proper incursion. So far it has products that provide some related services (Google Video and YouTube) but it doesn’t have a mechanism to exploit in full extent its technology. Google is providing its clients with access to its technology to place ads in different media channels but it is sharing the revenue with those media channels (Google Video, Audio, Print, and TV Ads). In the future, I expect that Google will move to buy or develop technologies that would close this gap. This channel has a similarity with what happens in the Online space and the difference between Adwords and Adsense. I believe Google will give priority to developing its own channels to improve its margins. If Google has done it for Online Searches, I don’t see why it wouldn’t do it for the other media channels.

FINANCIAL ANALYSIS[i]

Google has grown from $86.4 million in revenues in 2001 to $10,605 million in 2006 (expecting $16,598 million in 2007). This grown is explained by the increase of ad revenues due to an increase in effectiveness (Google technology) and an increase in online advertising spending (overall market).

Return on Equity (ROE) has been between the 20-25% range, but return on capital (ROC) has decreased from a high 54% in 2003 to a 17% in 2007 (LTM). This proves how Google moves away from a strategy that focus on bringing ‘business’ to a strategy of bringing ‘purpose’. In other words, Google goal is not only improve its shareholders value but also the world by organizing the information available.

Most of the liquidity and liability ratios do not make sense with Google given its zero debt level.

On the balance sheet side the most important number here is the increase in cash & equivalents for the past years. This allows Google to not have any debt and to have money to acquire new companies (i.e. new technologies).

Margins at an operating level had improved since 2004 because of the focus on Adwords strategy more than an AdSense strategy. Previously in this paper it was explained how these two strategies affect Google margins.

A company comparison (comps analysis) against Microsoft and Yahoo! it’s almost unfair. Google is growing so fast in top line without penalizing its margins that any comparison would leave the other two competitors at the bottom. Stock performance for Google has been a magnificent story (going from $100 at in 2004 to almost $700 today) only comparable to the earlier MSFT days.

[i] Capital IQ, Analyst Reports (Bear Stearns & Credit Suisse) November 2007

[1] Google deems cost-per-action as the 'Holy Grail', by Stephan Spencer (August 22, 2007)

[i] Google Inc SEC Fillings (10K – Feb 2007)

[ii] Google Inc SEC Fillings (10K – Feb 2007)

[iii] Google Inc SEC Fillings (10K – Feb 2007)

[iv] Google Inc SEC Fillings (10K – Feb 2007)

Google Analysis (Part 2/4) by Ana V. Ricaurte

2007-10-11T00:00:00.000-07:00

BUSINESS DESCRIPTION[i]

On its own words, Google is a global technology leader focused on improving the ways people connect with information. Google first product and core advantage is its search engine platform. Google maintains an index of websites and other content, and makes this information freely available to anyone with an Internet connection. Its search technology allows people to obtain nearly instant access to relevant information from its online index. For the common users it is unclear where Google index finishes and the internet starts. Google seems to be searching the internet instantly but what it is actually doing is searching in its indexed part of the internet. Google generates revenue by delivering online advertising.[ii]

BUSINESS UNITS[iii]

Google.com—Search and Personalization

Google first product and the key to its success is its search engine. Nevertheless, Google continue to expand its product portfolio. Other products now included are:

v Google WebSearch . Lets you search inside a website.

v Google Image Search . Lets you search for images.

v Google Book Search . Lets you search for books.

v Google Scholar . Lets you search for relevant scholarly literature

v Google Base . Lets content owners submit content that they want to share on Google web sites. Google Finance . Provides an interface to navigate complex financial information

v Google News . Gathers information from thousands of news sources worldwide

v Personalized Homepage and Search . Allows personalization

v Google Co-op and Custom Search . Google Co-op extends the power of Google’s search technology by combining its algorithms with the context, knowledge and expertise of individuals. Google Custom Search allows communities of users who know a lot about particular topics to build customized search engines.

v Google Video and YouTube . Google Video and YouTube let users find, upload, view and share video content worldwide.

Communication, Collaboration and Communities (Online Products)

Google wants to allow its users to share content so it has developed tools that have this ability.

v Google Docs & Spreadsheets . Word-like and Excel-like products, offered by Google without any cost. Accessible with an internet connection and a web browser. Next year Google would see Presentations, a Powerpoint-like product. All of these lets you share the file with others.

v Google Calendar and Gmail . Google’s free webmail service combined with a free calendar that lets you share your events and post with others.

v Google Groups . Helps groups of people connect to information and people that interest them.

v Orkut . Enables users to search and connect to other users through networks of trusted friends.

v Blogger . Allows users to publish their blobs (weblogs)

Downloadable applications (Desktop Applications)

Google wants to bring essential applications to its users for free (e.g. antivirus, photo organizers, media players, office-like solutions)

v Google Desktop . Lets people perform a full-text search on the contents of their own computer.

v Google Pack . Free collection of safe, useful software programs from Google and other companies that improve the user experience online and on the desktop. It includes programs that help users browse the web faster, remove spyware and viruses and organize their photos.

v Google Toolbar . Search box to web browsers.

Google GEO—Maps, Earth and Local

Google wants to provide geographic information at all levels.

v Google Earth . Lets users see and explore the world from their desktop.

v Google Maps . Helps people navigate map information (i.e. MapQuest competition).

v Google Sketchup . 3D modeling tool.

Google Checkout

Google Checkout is a service for users, advertisers and participating merchants that provides a single login for buying online and by helping users find convenient and secure places to shop when they search.

Google Mobile

Google Mobile lets people search and view both the “mobile web,” consisting of pages created specifically for wireless devices, and the entire Google index, including popular products like Image Search. Users can also access a variety of information using Google SMS by typing a query to the Google shortcode. Google also offers Google Map, Blogger and Gmail Mobile.

Google Labs

Google Labs is the tech lab where google creates all its new products. Users can try prototype versions.

GENERATING REVENUE[iv]

Google generates revenue primarily by delivering relevant, cost-effective online advertising. Google has five channels to distribute its advertising:

v Online . With AdWords, an auction-based advertising program that enables advertisers to deliver relevant ads targeted to search results or web content. There are two channels inside the online space:

o AdWords: Delivers online ads inside Google owned websites. Online ads placed in the right side of the site, next to the search results.

o AdSense: Delivers online ads inside Google network (user owned websites). Google recruits million of users that use its AdSense platform to provide online ads in their website. The users get a share of the profit.

o Interesting enough Google doesn’t disclose separately its revenue from the Mobile effort and platform.

v Video . With Google Video Ads, user-initiated click-to-play video ads that run on its web sites and the web sites of its Google Network members.

v Television . With Google TV Ads, an automated online media platform that schedules and places advertising into TV programs.

v Radio . With Google Audio Ads, an automated online media platform that schedules and places advertising into radio programs.

v Printed Media . With Google Print Ads, a web-based marketplace for placing ads in print media.

Google derives most of its revenues from fees Google receive from its advertisers through its AdWords and AdSense programs.[v]

[i] Google Inc SEC Fillings (10K – Feb 2007)

[ii] Reuters

[iii] Google Inc SEC Fillings (10K – Feb 2007)

[iv] Google Inc SEC Fillings (10K – Feb 2007)

[v] Google Inc SEC Fillings (10Q – Oct 2007)

Google Analysis (Part 1/4) by Ana V. Ricaurte

2007-09-11T00:00:00.000-07:00

INTRODUCTION

Google has been the one of the few success stories in tech industry (and the U.S. start-up arena in general) post the tech bubble burst in 2000. Google started by being the only internet search engine that actually worked to be the recipient of most of the advertising money that poured into the internet market. Google was able to monetize its traffic and technology by using targeted internet ads in its network.

Now the problem is obvious. At a revenue CAGR of 148% for the past 4 years, Google needs to keep the fast pace to not disappoint its valuation of $215B+ and its 50x+ PE multiple. Google needs not only to keep its high revenue growth (60% for the last twelve months) but also its high margins (EBITDA 37.5% for the LTM).

For that reason Google is constantly exploring different alternatives to keep the fast pace. It strategy can be summarize in the following chart.

Products / Markets

Old Markets/Channels

Old Products

[Doing it better] Optimize the way of doing business. Google is exploring different ways of making sure that its ads are getting to the right people at the right time. It moved away from charging for ad display to a more realistic pay per click. Google would continue exploring path for a more profitable way to exploit its platform and its product/service portfolio.

New Products

[Leveraging its network] Create new products/services that can be utilized by its current platform/network. Google has constantly created new products for its current platform. A good example is its quasi-Office offering (Docs, Spreadsheet and Presentations, Gmail + Calendar + Contacts). Monetizing all its new offering is the complicating part of this strategy.

Products / Markets

New Markets/Channels

Old Products

[Leveraging its technology] Obtain access to new markets/channels for its existing products/services. Google has been exploring in the recent years new way of expanding its reach. Being a advertising platform Google wants and needs to expand to other channels (printed media, TV media –i.e. YouTube, and Mobile media-i.e. Androide) to be able to further monetize its technology. Google is also expanding to new markets (e.g. China). This represents a new set of capabilities that needs to develop to be successful.

New Products

[Leveraging its know-how and knowledge pool] Exploring new opportunities. Google is constantly exploring new products in new channels (i.e. 23&me, Google Earth, ). Google either invest (minority/majority) stakes in other companies or actually develops the product inhouse. It is still unclear for me how Google plans to monetize these ideas. One possibility could be that Google never plans to (following its unsaid motto “Don’t be Evil”

The Tech-Dutch Disease

2007-08-11T00:00:00.000-07:00

I believe that there is certain similarities between the tech bubble in the United States in the 90s and the Dutch Disease in the 60s. I think we can draw certain similarities and understand some of the causes and consequences of having such a strong industry pushing the economy.

DEFINITION

Dutch disease is an economic concept that tries to explain the seeming relationship between the exploitation of natural resources and a decline in the manufacturing sector. The theory is that an increase in revenues from natural resources will deindustrialise a nation's economy by raising the exchange rate, which makes the manufacturing sector less competitive. (Wikipedia)

The classic economic model describing Dutch Disease was developed by the economists W. Max Corden and J. Peter Neary in 1982. In the model, there is the non-traded good sector (this includes services) and two traded good sectors: the booming sector, and the lagging sector, also called the non-booming tradable sector. The booming sector is usually the extraction of oil or natural gas, but can also be the mining of gold, copper, diamonds or bauxite, or the production of crops, such as coffee or cocoa. The lagging sector generally refers to manufacturing, but can also be agriculture; there can be deagriculturalisation in addition to deindustrialisation. (Wikipedia)

A resource boom will affect this economy in two ways. In the resource movement effect, the resource boom will increase the demand for labor, which will cause production to shift toward the booming sector, away from the lagging sector. This shift in labor from the lagging sector to the booming sector is called direct-deindustrialisation. However, this effect can be negligible, since the hydrocarbon and mineral sectors generally employ few people.^[3] The spending effect occurs as a result of the extra revenue brought in by the resource boom. It increases the demand for labor in the non-tradable, shifting labor away from the lagging sector. This shift from the lagging sector to the non-tradable sector is called indirect-deindustrialisation. As a result of the increased demand for non-traded goods, the price of these goods will increase. However, prices in the traded good sector are set internationally, so they cannot change. This is an increase of the real exchange rate.^[4](Wikipedia)

ANALYSIS

Lets run a parallel analysis between the tech boom and bubble bust in United States in 2000 with the Dutch disease in the 60s-70s in the Netherlands.

Lets run the ideas in parallel to see where we get to:

Category	Dutch Disease	Tech Boom and Bubble Bust
Time Frame	1959-1970s	Late 1990s - 2000
Location	The Netherlands	United States
Booming Sector	Natural Gas	Technology + Internet
PREREQUISITES:
(i) Productivity factors	Couldn’t increase productivity of other goods or services being produce. So any increase in demand would go directly to prices	Productivity raise up with new sector offering and demands creating an initial virtuous cycle of production.
(ii) Role of Government	Generous Welfare worsening the situation (more inflation)	Didn’t play any role (?). From my understanding Maybe laws on immigration helped the bubble. There were alot of technical people being hired from foreign countries to work in Sillicon Valley. But I view this as something positive that revamps the technology/knowledge levels of the country.
(iii) Role of Central Bank	Didn’t control for high inflation because it was PEG to the dollar (read: Bretton Woods)	Couldn’t keep raising interest rates. Thus provoking later on a house boom also.

CONSEQUENCES:
(a) Resource Movement consequences	Wage consensus for all industries (so booming sector raised the wages for everyone)	Close to full employment? At least we know that every sector was having problems hiring young employees due to internet/technology industries (i.e. start-ups). You could see how the finance industry that normally had all the MBAs were being over compensated to discourage them to go to work for a start-up company.
(b) Spending Effect	The energy sector boom increased consumer spending on non-traded goods and services such as real estate, education, health and construction. Increase demand combined with high wage cost push inflation up.	The tech sector boom influence the financing side of the equation creating a valuation bubble instead of inflation.
(c) Real Appreciation of the local currency	Pressure from lack of competitiveness due to the combination of inflation and fixed exchange rates.	It is tough for me to come up with a good example that shows the real appreciation of the dollar on this period but maybe the devaluation of other strong currencies in comparison with the dollar can prove this point.

CONCLUSIONS

It is clear that the Tech Bubble in the US had certain characteristics of Dutch Disease. The only clear difference that could make this entire analysis incorrect is the relationship of the Tech/Internet industry with the entire economy. On one side technology is clearly link to the entire economy. Development or research spent in technology would later be helpful to the entire economy. Spill overs are expected. On the other when we talk about Dutch Disease my understanding is that there is few spill overs to the entire economy. For example, the development of the oil industry doesn't cause technology of the manufacturing or agriculture sector to improve.

The US economy had the pressure of a booming sector (internet/technology). On one hand it had the 'resource movement effect'. People and money were going to the internet economy and not to the traditional industries. Nevertheless the good effects of such movement were the rapid development of new technologies that would later help the traditional economies. It is like if the development of the oil industry would cause new technology in the development of the manufacturing industry. This would help in the future. The 'spending effect' was not that clear. Prices for real estate (for example) were going up. I don't know if the price increase was because there were few developments due to the lack of resources or because there were excess liquidity. Despite the reason of the causes, the consequences were clear. The tech bubble created an a bubble in the entire market economy that ended up with the correction of 2000. Just recently the S&P, Dow Jones and other indexes recovered from that crash of 2000 that took almost 50% of the value of some of those indexes.

Internet Real Estate (and the Saga Continues...)

2007-07-11T00:00:00.000-07:00

[As published a year ago there is more and more interest for purchasing domain names to capture direct search ad revenue]

May 28, 2007

E-Commerce Report
NEW YORK TIMES

Millions of Addresses and Thousands of Sites, All Leading to One

By BOB TEDESCHI

THINK you have a good handle on the Internet economy? Try this one.

What Internet business has raised $120 million in financing in the last year, owns 725,000 Web sites, and has as its chief executive the former head of Primedia and International Data Group?

If you guessed NameMedia, a privately held owner and developer of Web sites based in Waltham, Mass., you take the prize. Otherwise, consider reading on.

According to Kelly P. Conlin, the chief executive of NameMedia, the company’s business is best seen as an online property developer.

“What we’ve wanted to do, quietly, is amass the largest real estate position on the Internet, which we feel we have,” Mr. Conlin said.

Some of those properties, he said, are the equivalent of “oceanfront” sites, or high-value addresses like Photography.com or DailyHoroscope.com that NameMedia will populate with relevant editorial content. Those who type in any of NameMedia’s other 6,000 or so photography-related Internet addresses, like photographyproducts.com, will land on Photography.com.

The business is a far cry from the days of cybersquatting, where speculators bought up names of businesses to which they had no legitimate claim, but it does represent a vindication of sorts for many who bought hundreds or thousands of random Web address names on the hope that one day they would be worth something.

Analysts suggest that NameMedia and its competitors could represent the next wave of Internet initial public offerings, while also providing a peek at a significant change in what people see when they stumble onto obscure Web properties.

Behind this suddenly active business category — which includes companies like iREIT in Houston, Marchex in Seattle, and Demand Media in Santa Monica, Calif. — is the recognition that not all Internet users turn to a search engine when they are confused about where to find something online. Rather, 5 percent to 10 percent of people will simply type in a name that sounds as if it might suit their needs.

The so-called direct search or direct navigation approach is seldom fruitful for users, nor has it been particularly profitable for owners of the sites that they visit. An obscure Web address may have four or so visitors a month, and perhaps half will click on an ad.

“But if you have hundreds of thousands of those, it adds up,” Mr. Conlin said. “It’s an inside-out way of creating volume.”

Mr. Conlin said that the properties in his portfolio, which includes about 1.4 million Internet addresses that independent owners have placed on NameMedia’s network of sites, attracts about 60 million monthly visitors. NameMedia will choose which ads to place on those sites, and will collect some of the revenue.

For other sites not likely to be sought by hobbyists, like CellularPlans.com or CareerGuide.com, NameMedia fills the home page with links that users would otherwise see if they typed the same search Web address into a Yahoo or Google search box. The search engines pay NameMedia a commission whenever someone clicks on the links.

NameMedia, which began in 1999 as YesDirect, was reintroduced in May 2006 with an undisclosed amount of equity financing from Highland Capital Partners and Summit Partners, two Boston venture capital groups, and more than $100 million in debt financing from Goldman Sachs. The company used part of that money to buy the portfolios of dozens of domain-name consolidators.

To decide which of those sites to develop and which to fill with search engine ads, NameMedia hired Hugh O’Neill, who previously oversaw $30 billion worth of financial derivatives for Sun Life Financial. Mr. O’Neill uses, among other things, the expected number of clicks and the value of the ads in a category to calculate the future value of a domain name.

If a prospective buyer is interested in a site that appears on NameMedia’s network, the transaction is conducted on one of the company’s marketplace sites, like BuyDomains.com or Afternic.com, and NameMedia collects a commission.

So far the company’s strategy is paying off, Mr. Conlin said, with company revenue doubling last year, to $60 million.

Youssef Squali, an analyst with the investment firm Jefferies & Company, said NameMedia faces stiff competition, “but I see these guys as the front-runner.” Among other things, Mr. Squali said the profit margin at NameMedia was 40 percent — a number that other industry executives said fairly represents the category over all.

“They’re paying nothing to acquire a customer,” he said. “I think the next wave of I.P.O.’s will be around this area.”

The direct navigation market attracted more than $800 million in ads last year, which publishers largely shared with Google and Yahoo. That figure could reach $1.1 billion in 2007, said Jordan Rohan, an analyst with RBC Capital Markets.

Site owners understand they can earn more ad dollars if their sites display more than text ads. The question, however, is how to fill the more valuable sites with content without hiring teams of writers, video producers or others.

Executives have found interesting workarounds. Marchex, for instance, will reintroduce in June its roughly 100,000 sites, using proprietary technology that automatically pulls relevant content from sites outside the Marchex network, and shares with those sites any ad revenues that result. Marchex also announced that the Latin American Channels division of Fox Broadcasting would provide videos for more than 100 Spanish-language sites in the Marchex network.

IREIT, likewise, recently struck a deal with RealNetworks to distribute that company’s online games on its game-related Web sites. According to Craig Snyder, the chief executive of iREIT, online publishers are happy to find a way to distribute their content to more people, and thereby increase their revenues.

“It’s become harder and harder for them to gain audience share,” he said.

NameMedia recently finished building technology where visitors to niche sites — say, one on 1957 Mustangs — will be presented with links to other sites with similar images. The links will be between sites within the NameMedia network, but Mr. Conlin said that an unnamed Internet photo-sharing service with more than five million monthly users would soon join.

“It’ll be a thinking person’s social network,” Mr. Conlin said. “The community becomes the content.”

Source: http://www.nytimes.com/2007/05/28/technology/28ecom.html?th&emc=th

COLOMBIA - Extreme Investing (Business Week)

2007-06-11T00:00:00.002-07:00

[Colombia becomes the destination for foreign investors looking for a better risk vs. return play]

MAY 28, 2007
BUSINESS WEEK
COVER STORY
By Roben Farzad

Extreme Investing: Inside Colombia
An improbable journey from crime capital to investment hot spot. Can this boom last?

"You going there to get some kilos?" asks the driver as he drops me off at Newark's international airport for my six-hour flight to Bogotá. He grins at me in the rear-view mirror as if he has cracked the most original one-liner in history. "Like Scarface," he continues, shifting to his Pakistani/Latino gangster accent: "Say hello to my little friend! Pow! Pow!" He hands me my bags and reminds me to call my mom and make peace with the Almighty before I embark for certain death. "You are crazy, my friend."

Traveling to Colombia to chronicle the investment miracle unfolding there seemed perfectly reasonable a few weeks earlier. The stats all scream "Go! Go! Go!": Colombia's stock market has soared fourteenfold since October, 2001. Foreign direct investment and capital inflows have more than doubled, while real estate prices have tripled in many areas. Citigroup (C ) CEO Chuck Prince even kicked off his February "world tour" in Bogotá, where the bank is building branches and a Latin American call center. But when most Americans hear the name Colombia they think about the late Medellín drug lord, Pablo Escobar. And roving paramilitary death squads. And speedboat-loads of cocaine headed for Miami.

I've been assured by bankers that things are getting much better in this nation of 42 million. But it isn't until I step onto the packed 737 to Bogotá that I get my first real sense of the intense interest in Colombian investments. I spy at least 20 business suits, including the laptop-toting Swede sitting next to me who's building a boutique hotel in the beautiful 16th century city of Cartagena on the north coast.

Investors like these have visited many exotic ports in recent years. Colombia's surprising rise has been fueled by two larger trends: the enormous amount of money sluicing through global markets and investors' increasing risk tolerance. First, cash poured into the so-called BRIC countries—Brazil, Russia, India, and China. Next it flooded riskier secondary destinations such as Turkey and Poland, and last year, with ferocity, Vietnam. Now money is gushing into third-tier hinterlands fraught with political and economic problems, where even the rule of law isn't a given.

THE CONFIANZA INDEX
Call them extreme emerging markets. The Standard & Poor's/IFCG Frontier Index of 22 such destinations, which includes investing curiosities like Lebanon, Côte d'Ivoire, and Bangladesh, has gained nearly 400% in the past five years. The question is whether these nascent markets have what it takes to parlay the fickle enthusiasm of hedge-fund traders and other investors into long-term economic development.

Yet Colombia is so extreme that it hasn't even made the Frontier Index. Its stock market has an aggregate capitalization of just $59 billion. In this parallel investing universe, price-earnings ratios take a backseat to fuzzy measures such as confianza, which translates into confidence and trust but is more accurately described as the general sense that people can safely transact business and get through everyday life unharmed. The handful of Wall Street analysts who cover Colombia supply their clients with charts of murder rates and kidnappings.

President Alvaro Uribe, who took office in 2002, nearly five decades into a civil war that has pitted Marxist guerrillas against right-wing death squads, has made confianza his overarching goal. Killings and abductions are down sharply in the big cities, and that has been a boon for all manner of investments, from stocks to real estate. "I guarantee that if you graph the decline in kidnappings to investment gains, the correlation would be one-to-one," says Ben M. Laidler, head of Andean research for UBS Pactual.

On a continent whose economic history is the stuff of a blooper reel, Colombia's strong fundamentals stand out. Its $130 billion economy, a world leader in the production of coffee, petroleum, textiles, and flowers, is growing at 6.8% a year, two full points faster than the Latin American average. In the past 10 years, Colombia has slashed its inflation rate from 18% to 5%, and since Uribe was elected, unemployment has dipped from 16% to 13%. The nation has never defaulted on its debt or experienced hyperinflation. And entrepreneurial thinking is spreading. Run a Google (GOOG ) geographical-hit query, and you'll see that, per capita, nowhere in the world are there more searches for the words "Peter Drucker," the late management guru, than in Bogotá. No. 2? Medellín.

Yes, Medellín. Once the murder capital of the world, this city of 2.4 million is regaining its status as a commercial hub, hosting regional offices for a growing roster of multinationals including Philip Morris (MO ), Toyota (TM ), and Renault, as well as globally minded Colombian companies that make up 70% of the country's stock market value. More high-rises are under construction here than in Manhattan and Los Angeles combined.

But all of it—the stock market gains, the development, the rising living standards—rests on confianza. Foreigners' view of Colombia as a lawless, violent, riven land won't change quickly. As Commerce Minister Luis Guillermo Plata acknowledges, "Why would I invest in a country if I can't go there?"

As I get into the cramped cab that's taking me to my hotel, I can't help thinking about the fabled "millionaire's tour of Bogotá," a stretch of road where colluding cabbies and thieves once drove passengers from ATM to ATM to drain their bank accounts. And then there's the drugs. Colombia still produces the majority of the world's cocaine, an ongoing crisis that draws a steady supply of U.S. military and financial aid. Even corporate crime here takes on deadly overtones: Cincinnati-based banana giant Chiquita Brands International (CQB ) was in the news recently for admitting to having paid $1.7 million in protection money to a Colombian paramilitary group on Washington's list of foreign terrorist organizations.

I'm here to find out whether Colombia's fledgling stock market can keep surging, whether its financial and physical infrastructures can accommodate the flood of investment, and whether an equity culture can take hold.

At the center of everything is President Uribe. "We need to rescue international confidence in our country," he tells me in his heavily guarded compound in Bogotá's historic center full of Spanish colonial architecture. Access to Uribe is preceded by an hour of security checks and chilling looks from guards holding bayonet-tipped machine guns.

The 54-year-old Uribe is a rarity in increasingly leftist Latin America. A center-right ruler with an approval rating of more than 60%, he won a landslide second term in 2006 after having amended the constitution to allow him to run again. Uribe knows Colombia's history of violence firsthand: A decade ago he was governor of Medellín's province, and in 1983 his father was murdered by kidnappers. The sometimes dour leader has driven most of the drug traffickers and leftist guerrillas out of urban centers, though they still reign in remote regions.

But allegations have surfaced in Colombia that the President himself has links to right-wing paramilitaries who murdered hundreds, including labor-union activists. On May 14, 20 Colombian lawmakers and businessmen were arrested on charges in connection with the scandal. Colombia's police chief and head of police intelligence, meanwhile, were ousted amid allegations of illegal wiretapping of opposition politicians and journalists. Uribe vehemently denies any personal connection to the affair. (See Alvaro Uribe: The Change Agent).

Despite his obsession with law and order, the economy is never far from his mind. "The state is the most important private enterprise," he says, "and the public is like a universe of shareholders." Javier Vargas, a Colombian banker with Credit Suisse (CS ), has heard Uribe sound that theme many times. "He talks like a person who is selling and marketing his country," he says. "Investor confidence is key for him." In May, Uribe visited Washington to meet with supporters in the Bush Administration and lobby congressional Democrats on a free-trade pact between the two countries. Democrats have been uneasy with Uribe since the recent allegations surfaced. But Colombia is a vital strategic ally in an increasingly hostile continent, bordered by Hugo Chávez' Venezuela and left-leaning Ecuador. Washington has sent Colombia $5 billion in aid since 2000, including $650 million last year; only Iraq, Egypt, Afghanistan, and Israel receive more.

For Uribe, a deal is crucial both for the tangible economic benefits and the perceptual ones. He has invested much political capital already, visiting the U.S. at least 25 times since taking office. Winning full free-trade benefits with the U.S. would do much to bolster the fragile investor confidence he has been nurturing, while a loss would damage his prestige. Uribe's challenge is one that everyone, from business leaders to taxi drivers, acknowledges. "Investing here is rooted in improving physical safety and lowering the risk of doing business," says Alexander P. Kazan, a Latin American strategist at Bear Stearns & Co. (BSC ) "You really cannot overstate the importance."

SLEEPY EXCHANGE
On a cool April morning, I make my way to Bogotá's bustling financial district. Amid the roar of motorcycle engines and a haze of bus exhaust, the district brims with young professionals sipping tintos—tiny cups of dark coffee—while chatting on newfangled cell phones. At every crosswalk and on street medians, the less fortunate hawk snacks, cigarettes, and telephone calling cards from salvaged baby carriages, stark reminders of the gaping disparities in this poor nation.

Halfway up a glassy office building is an ultramodern floor containing Colombia's stock exchange, the Bolsa de Valores. It's high-tech, but no one would confuse it with the NASDAQ. Just 12 people sit around a circular table staring at their flat-panel displays in a space no bigger than a conference room at a Best Western hotel. It's so quiet you might think you showed up to take the GMAT. I jokingly ask if we're at the right place. Our photographer wonders aloud if he should bother unpacking his equipment.

"This is it," says Jaime Sarmiento, the exchange's 34-year-old communications director, sensing the anticlimax of the moment. He points up at the ticker, a circular LCD sign. "Does anyone know how to turn this thing on?" The specialists on the floor arrange a photo op, choosing a mustachioed elder to sit on the elevated chair in the center of the ring and motion as if he is directing order flow. Truth be told, everyone is just waiting for 1 p.m., when the market closes and the power lunch scene takes hold. When I ask if the early close is a vestige of the Spanish siesta, I'm curtly told that it's purely a result of how little business there is to transact. Sarmiento takes us downstairs to tour the café, a swank lounge that was conceived as a high-energy, high-buzz meeting place for stock junkies. On this day, two or three guys sit around reading the paper, blissfully unaware of the handful of digits flickering on the wall-mounted display above.

Such sleepiness belies the market's breathtaking volatility. This is the central paradox of extreme emerging markets: With so few buyers and sellers, small upticks can quickly turn into major surges, while the faintest of downticks can lead to painful routs. After posting a 128% gain for 2005, second best in the world, the Bolsa nosedived 45% in two months during last year's late-spring emerging-markets swoon, the second-worst showing on the globe. It has since jumped 75%; on June 15, 2006, alone, the index gained 16%. It's down 5% in 2007.

All the choppiness merely confirms the suspicions of most of the locals, who eschew stocks for government bonds, even though they yield just 6% now, a third of what they did eight years ago. "The general public just isn't all that accustomed to stocks," says Rodrigo Jaramillo, CEO of Interbolsa, the country's largest brokerage, and former chairman of the stock exchange. He notes that fewer than 70,000 Colombians bought local shares in 2006.

Even people who invest for a living are reluctant to buy Colombian stocks with their own money. "I like to invest in young cows," admits a 26-year-old private investment adviser in a British-spread collar and Hermès tie between bites of an empanada in a breakfast joint near the exchange. His eyes light up as he explains that his uncle has given him dibs on investing in heifers, an inside opportunity that has lately scored him 20% to 30% annual returns. Why dabble in risky stocks, he asks, when he can collect steady returns on the family ranch? "I sponsor the cows until—how do you say?—graduation," he says, grinning diabolically, of the day when they're auctioned off and he reaps his windfall.

But in fits and starts local investors are coming around. I'm struck by how many twenty- and thirtysomethings in Bogotá are at the leading edge of business and civic life: chief executives, money managers, restaurateurs, even cabinet ministers. Young and educated, Colombia's new elite could ply their trade anywhere in the hemisphere. A decade ago there would have been no question that they would end up abroad. Just four years ago, Bogotá's Club El Nogal, a hot night spot, was car-bombed by a leftist rebel group, resulting in 36 deaths. But El Nogal has come back stronger than ever. Even with all the bomb-sniffing dogs, the place is nearly impossible to get into on a weeknight. Bogotáns consider it a metaphor of their resilience.

I meet some young professionals for dinner at Balzac, a restaurant modeled after Manhattan's trendy Balthazar. José María de Valenzuela, a recently minted MBA at INSEAD in France, lights a cigarette and reflects on his accomplishments. "There was just a small possibility I'd end up back here," he says. All of 32, Valenzuela, who did his undergraduate work at Brown University a decade ago, used to specialize in what you might call distressed investing. "People were afraid to leave the city," he recalls of the siege mentality of seven or eight years back, when terrified families sought escapism at his miniature golf course in Bogotá. "You could buy real estate just for the cost of the taxes." Which is what Valenzuela did, before selling into a property boom and plowing his winnings into what he and a former finance professor correctly thought would be the start of a roaring bull market for stocks. Last summer, Valenzuela rolled those profits into a partnership with HenCorp Futures, a U.S.-based trading firm, to offer currency strategies to foreign investors—a critical building block to outside participation in the Colombian market. The only way to buy Bolsa-listed stocks directly is in pesos, and there are no pure-play Colombian mutual funds available to foreigners.

The next afternoon, on Valenzuela's recommendation, I head to Harry's Bar, in a tony Bogotá neighborhood that resembles San Francisco's Russian Hill. Amid the din of clinking wine glasses, blond-streaked women and sharply dressed men pick at plates of seared tuna and Argentinian steak. In the evenings the place is often overrun by actors, soccer stars, and diplomats. The owner, spotting my reporter's notebook, stops by. "Please tell America we're not a bunch of drug dealers shooting at each other from trees," he says.

COFFEE BUZZ
In walks my lunch guest, Felipe Gaviria, the boyish money manager whose name is on the lips of everyone in the smart-money set. In 1997, at 23, Gaviria was promoted to head of currency trading at a small bank in Cali. Two years later he left for business school in Barcelona. He returned to Colombia when Uribe was elected in 2002, sensing the moment was right to buy Colombian property and bet that the peso would strengthen against the dollar. Now he oversees $3 billion in pension assets for Spain's Grupo Santander. It's common knowledge that Gaviria is being wooed by bulge-bracket investment banks and hedge funds. "I receive everybody," he says coyly.

With more money pouring in as the economy grows, Gaviria says he's impatient for more local investment options. Fortunately for him, some big ones are just around the corner. In an audacious move, Procafecol, of the fast-growing Juan Valdez coffee shop fame, is floating its shares on the Bolsa. The unlikely beneficiaries: thousands of rural caficultores, or coffee growers, who make up Colombia's national coffee alliance. They've recently been swarmed by an army of financial advisers dispatched to the countryside. "Your preferred shares give you dividend priority over ordinary investors," reads the glossy offering letter, as if to poke fun at the more cosmopolitan Class B shareholders.

The real game changer could be the $4 billion initial public offering of state oil concern Ecopetrol, one of South America's four largest. In short order, it could become the most widely held stock on the exchange. And with U.S. bankers circling, a New York Stock Exchange (NYX ) listing could be in the offing. The only other Colombian stock listed in the U.S. is Medellín-based Bancolombia (CIB ), whose shares have jumped twentyfold in the past five years.

Indeed, Wall Street is doing its best to ride the Colombia wave. In 2005, SABMiller (SAB.L ) PLC took over Colombia's biggest brewery, Bavaria, for a record $7.8 billion, with Merrill Lynch (MER ), JPMorgan Chase (JPM ), Lehman Brothers (LEH ), Morgan Stanley (MS ), and Citigroup (C ) advising on the acquisition. Last year ABN Amro advised on the sale of a controlling $657 million stake in a key oil refinery to Switzerland's Glencore International. "You're having more and more investment banks going into Colombia," says Eric Newman, a Bogotá native who was recently poached from Lehman Brothers by Morgan Stanley to cover the country for its Miami-based Latin American private banking arm. He shuttles to Colombia 20 times a year.

Not only are Colombia's top companies doing better at home, they're also branching out to the rest of Latin America and beyond. A company called Chocolates, essentially Colombia's Kraft Foods (KFT ), now ships to Los Angeles and the Southwest, while Argos, the country's foremost cement producer, has been buying operations in Arkansas, Georgia, North Carolina, and Texas. Bancolombia recently acquired El Salvador's largest bank.

One sign of the rising fortunes in Colombia is the sudden misfortune of the self-proclaimed Bulletproof Tailor. Miguel Caballero makes suits and other apparel tough enough to withstand gunshots. His garment factory, located in a seedy neighborhood of Bogotá, features a picture gallery of famous customers, including action film star Steven Seagal and President Uribe, as well as glossies of Caballero discharging his handgun into the bulletproofed torsos of employees. Ten years ago, he says, his company sold 70% of its wares in Colombia. Now, thanks to the ebbing violence, that figure is just 20%. Caballero is dispatching salesmen to Russia, Venezuela, even Iraq. "The idea is to save the business," he says. "You can say we're globalizing."

The growing confidence in Colombia brings a new set of challenges. The streets are safer, and citizens are road tripping again. Export-import activity is steadily growing. Tourism has nearly tripled in five years, and beach-lined, historic Cartagena is among South America's most expensive real estate markets. But with all of that happening, Colombia's highways, roads, ports, and other industrial backbones are becoming increasingly overburdened. "We're really behind on infrastructure," says Juliana Ocampo, a recent MBA from Massachusetts Institute of Technology who returned to Bogotá to work for Mexican cement giant Cemex. "If you ask everyone here, that's where the investment needs to flow next." Says Gaviria, the young money manager: "Our north port is terrible. If we had a world-class port project, I would invest right then and there." Bear Stearns warned in a recent report that growth could halt if tens of billions worth of infrastructure isn't soon built, noting that Colombian pension funds are clamoring to invest. If the buildout stalls, it will undermine Uribe's reforms.

STOCK OPTION
I take up the issue with Vice-President Francisco Santos. Schooled in Texas and Kansas and formerly the editor of Colombia's largest daily newspaper, Santos was once kidnapped by Pablo Escobar's men and surely draws satisfaction from the fact that the cartel's late-'80s vehicles sit rusting in a pound adjacent to his office. "The roads are getting so clogged," he concedes. "But who will pay for all the infrastructure?"

Financiers argue that the money is there for the taking, if only the government would change its thinking. Historically, Bogotá has issued bonds to fund such projects, but investors were hungrier for them when they yielded 20%. It also takes time to rouse all the layers of bureaucracy in the way. Bankers want the government to sell equity in the projects instead, following the privatization trend sweeping Europe and the U.S. "We can build roads without a penny of government money," insists Pedro Nel Ospina, the head of Corficolombiana, one of the country's top investment and merchant banks. "Let us do it already. Give us equity."

The government isn't ready to make that leap just yet. But the fact that a vigorous debate about how best to become an ownership society is heating up—complete with business page editorials and regional free-trade zones—shows how far this rugged stretch of the Andes Mountains has come.

Medellín, in particular, is undergoing one of the most extraordinary urban makeovers in modern times. "Our trucks, drivers, and distributors were attacked at least once a day," recalls Carlos Enrique Piedrahita, president of Chocolates, of the scene seven years ago. "Now it just doesn't happen."

The 45-minute ride to town from Medellín's main airport winds through lush forests and fragrant flower farms. The city is shaped like a bowl, with commerce and wealth concentrated at the center as poverty stares down from the rim. It all descended into chaos with the decline of Medellín's textile industry in the 1970s and the simultaneous rise of the drug trade. In 1991, two years before Escobar met his end in a rooftop gunfight with police, he was recruiting cocaine-addicted teens in the hillside slums, paying them $750 for every police officer they murdered. Gang shootouts continued into emergency rooms. "One can have the impression that Medellín is about to drown in its own blood," The New Yorker magazine's Alma Guillermoprieto wrote in 1991, when the city's homicide rate was 381 per 100,000, the highest in the world.

But exploding revenue from Medellín's resurgent corporate tax base is funding a rapid metamorphosis. Now those very same shanties are connected to the city center by a sky-lift gondola of the sort you might find at EPCOT Center. New libraries and schools court students from other parts of Colombia. "Imagination Park" stands where murdered bodies were once dumped. The business assistance office in the heart of the slum is helping tiny food stores and Internet cafés flourish where there used to be only crumbling cinder block and exposed sewer pipes. Today, Medellín's murder rate is 28 per 100,000, lower than those of Baltimore and Washington, D.C.

Statistics alone don't capture the sense of rebirth here. Atop the slum, in the shadow of ascending gondolas and a new computer lab, the city's poorest children think they're kings of the hill. They chase after me, tugging at my jacket, 30 or 40 at once. It's not my money that they want, it's pictures of themselves and their friends. As I sit down to catch my breath, a runty seven-year-old boy with a precocious understanding of digital photography suddenly climbs out from under the bench. "I don't have e-mail yet," he says. "So print it for me for when you come back, O.K.?"

With Cristina Lindblad in New York

Source: http://www.businessweek.com/magazine/content/07_22/b4036001.htm?chan=top+news_top+news+index_best+of+bw

How to analyze Family Business Systems.

2007-05-11T00:00:00.000-07:00

Family Business Situation should be analyzed in three fronts: Family, Business, and Ownership. The Family lense would analyze the problems with the family and it would include everybody that is family. The Business lense would analyze the problems of the business and it would include family members that is working in the business. The Ownership lense would analyze the problems with the ownership of the company and it would include only the family members that are shareholders. This is a three circle system (Family, Business and Ownership). Some parts of the circles would superimpose (i.e. family members that are both managers and owners of the company). This model was developed by a Harvard Business School Professor, John A. Davis.

Outcomes/Conditions:

Family:

Maintain family unity
Fair different than Equal
Self-sacrifice
Not entitled
Educating about the business
Trust & Identity
Buy into the responsibility to the business stewards

Business:

Long term growth and profitability
Clarity on the business roles
Reinvestment / Improving
Need independent voice(s) to mediate between family & business
Leader finds solutions best for everyone/majority
Voluntary
Competitive Hiring Practices
De couple ownership/employee status

Ownership:

Maintain family control
Owners need to know their rights, soles and responsibilities
Satisfied w/ownership
Transparency / Flow of info
Keep committed owners
Voluntary

Notes:

Managing Expectations
Trade-off
LT process
Anticipate & make rules before problems
Clear priorities of business and family

Tools / Vehicles

Family:

Family council / assembly (discuss priorities/clear rules/transparency)
Self understanding
Walk away
Educating the Family/Business/Ownership
Learning the history and lifestages of people to anticipate
Appreciation / Appreciative Systems
Do not take the members for granted
Patience
Contingency plans

Business:

Business governance
Rules
Advisors
Non family managers incorporated
Walk away
Reviews
Competitive hiring
Formal/informal feedback for Family employee
Family members given real (important) jobs
Contingency plans

Ownership:

Shareholder’s agreement
Succession Planning / Contingency plans
Buy/Sell agreement
Walk away
Mechanism for dispute resolution
A&B Shares Control & Flexibility

Note:

Ownership is power
Employees not there for the $ but for experience/environment
Appreciation, appreciation, appreciation
Humble
Respect other non-family members / positions
Communication (Remember that managers are not part of the family reunions)
Feedback

Is their National culture values the reason why entrepreneurs have florish more in United States and Europe?

2007-04-11T00:00:00.000-07:00

American[i] and Western European entrepreneurs and their firms were capable of seizing the opportunities to build international businesses across national borders because they were able to combine three factors: institutional support, appropriate national cultural values and multinationals leverage. These factors were key for entrepreneurs and firm not only in the first global economy but also both during the era of deglobalization after 1914 and during the second global economy after 1979.

INSTITUTIONS

The beginning of global entrepreneurs and their firms started with the building of well-thought institutions in their nations. There are two important characteristics for a national institution to be successful: (a) fairness and consistency, and (b) promote creation and accumulation of wealth.

Institutions that promote fairness and consistency across its constituents are able to create trust. By creating trust, the nation is able to leverage each citizen to form a larger support system. If the national institution wants to promote the creation and accumulation of wealth, then trust is its key component. To be able to promote the creation and accumulation of wealth, an institution needs to promote people and capital mobility. Trust is the factor that allows for people and capital to move around the country.

On one hand, trust-worthy institutions allow people to leverage each other to create larger support system. One example of this case is banks. Banks are able to operate because the citizens believe on the system would protect their investments. By trusting the institution, citizens are allowing to leverage each other to create more wealth. Banks are able to fuel the economy by investing on entrepreneurial ideas. Entrepreneurs are able to finance their ideas due to the existence of these support systems (i.e. banks, angel investors, venture capitalists, etc.)

On the other hand, trust also allows increasing people and capital mobility. When people know that there is consistent treatment and fair processes in their national institutions, they are more willing to move across the nation. When a nation has this environment, people would travel across the nation to find better opportunities with good chances of finding it. It is a matter not only of thinking that there are better opportunities out there but actually of finding those opportunities. When the national sentiment is full of trust, people can take the decision of looking for new opportunities across the country. Having consistent and fair institutions allows those people to find the opportunities. Success in this case is a combination of willingness to move and finding the opportunity.

Institutions in United States and Western Europe were developed to help their societies find and capture wealth. In United States, the founding fathers established a set of rules that treated everybody as equal. Being a nation of immigrants, United States made its institutions behave fair and equal with all its citizens. In Western Europe, its institutions evolved moving from an unfair system (monarchy) to a fair system (democracy). For example, Hans Wilsdorf (Hans Wilsdorf and Rolex) was able to create Rolex legacy because there was an implicit trust in the system. People trusted him with the idea of export product across Europe. Wilsdorf trusted the system that allowed him to ship his product across Europe. Wilsdorf was able to move to London and established his company because he trusted British institutions. Weetman Pearson (Weetman Pearson and the Mexican Oil Industry) was able to build its reputation before going to Mexico in the U.K. and the U.S. because of the fairness of the system. Infrastructure projects were given to the best constructors not to the ‘son’ of the minister. Then Pearson was able to capitalize on its reputation and take advantage of an unfair system in Mexico. It would have been impossible for Pearson to be such a global entrepreneur if he has been born in Mexico.

On the other hand, in developing nations, there are several examples that prove what happen in the absence of good institutions. The case Multinational Corporations in Apartheid-era South Africa: The Issue of Reparations shows how African institutions only favored the elite, creating inequalities among its citizens. The case Jamnalal Bajaj, Mahatma Gandhi and the Struggle for Indian Independence also shows the differences in treatment between Indians and British. It is clear how citizens of these countries didn’t have a similar trust-worthy environment than United States and Western Europe to create a range of global entrepreneurs. South Africa and India didn’t have supportive institutions that could allow entrepreneurs to leverage on their people for financial or human capital. The case Can Bollywood Go Global? also shows the lack of a supportive institution that can create a financing market to promote the movie industry. Bollywood is financed by the mafia corrupting its growth potential. The reason why India’s Technology sector has been successful in the recent years is because its participants are creating their own systems that they can leverage against (Jerry Rao: Diaspora and Entrepreneurship in the Global Economy), instead of trusting the national institutions.

Latin America also didn’t create institutions that promote wealth across its societies. Portuguese and Spanish colonization corrupted the opportunity for the region to develop fair institutions. Most of the Institutions in Latin America have been run by the elite, starting with the Spanish conquistadores. Nevertheless, there are still few entrepreneurs that have defied unfair national institutions to be able to conquer the international market. Natura (Natura: Global Beauty Made in Brazil) in Brazil has been able to create trust among its users and create a network in Brazil through its direct selling system that has proven successful. The Colombian Coffee Federation (Thousand Hills Coffee Co. of Rwanda: Breaking New Grounds) has also leverage on its growers to build a cooperative that can tackle international crisis and promote its product internationally.

CULTURE

In addition to the fairness of the institutions in the country, the national cultural values play a key role in developing and promoting entrepreneurship. The difference between local and global entrepreneurship is a matter of the right institutions combined with some key cultural values.

Local entrepreneurship is just a matter of culture and individual’s characteristics. When individuals lived in a culture where creation of wealth is the ultimate goal, entrepreneurship spirit increases. All the nations in the world posses this drive, and that’s why all nations have local entrepreneurs (95% of the businesses in the world are family businesses). Nevertheless, having global entrepreneurs requires more than just a drive for wealth. As mentioned in Professor Geoffrey Jones’ course (Entrepreneurship and Global Capitalism at the Harvard Business School), global entrepreneurs possess three main characteristics that are key for their success: (i) Understanding of global trends, (ii) High geographic mobility, and (iii) Acute business model and organizational knowledge. Furthermore, global entrepreneurs that posses this three characteristics leverage its local institutions (i.e. financial institutions) to be able to tap into the global market.

Before this century, United States and Western Europe, in general, are more likely to have these three main characteristics of global entrepreneurship than other countries in the world. Given that United States and Western Europe are the leaders of the global economic market, their entrepreneurs’ knowledge on global trends are better seeded than their competitors. Nowadays, there has been a shift of power to other countries in the world. Asia could take the lead in the future given its growth potential. If China can set the global trends in the future and its institution can promote entrepreneurial characteristics (i.e. trust), then Asia would become another powerful region for global entrepreneurs.

Additionally, people from United States and Western Europe are more accustom to move around. Europeans has always been a very mobile group. In comparison with Latin America or Asia, Europe and the United States are very easy to travel within. Even if geography is not in consideration, the European and American[ii] culture were based on people’s mobility. For example, people that populated United States were mostly immigrants. American[iii] culture was based on finding new opportunities to create wealth, even if that meant leaving the family behind. Some may argue that that is why American[iv] culture does not have such family ties as other countries in the world, but this is hard to determine. On the other hand, it is clear that an ability to sacrifice family ties for pursue of wealth can bring a lot of advantages when thinking about global opportunities. In the case of Weetman Pearson (Weetman Pearson and the Mexican Oil Industry), it is clear that he was able to move around the world and travel so much because he was able to sacrifice family time.

Lastly, Western Europe but specially United States has been able to accumulate business knowledge; business knowledge that is reflected not only in the publications but also in the competitive environment. When there is a competitive culture that is in a race to create and accumulate knowledge, global entrepreneurs flourish around it. Equally important is the transfer of knowledge inside the culture. In this case, Western Europe and United States had an advantage against other countries. Business consultants began in Western Europe and United States. Incidentally knowledge transfers went between Western Europe and United States with the globalization of consultancy (McKinsey and the Globalization of Consultancy), creating a virtuous circle that was difficult to break.

Virtuous Circle

Trust on Management Practices --> Knowledge Accumulation --> Transfer of Knowledge --> Excellent results on average --> Trust on Management Practices

Even though there are some counter examples for such virtuous circle (Toyoda Automatic Looms and Toyota Automobiles), it is clear that the initial advantage was for Western Europe and United States. In the second global economy, some of this virtuous circle has been transfer to Asia and some countries in Latin America (Brazil at the Wheel)

MULTINATIONALS

Multinationals play a key role on global entrepreneurship. Multinational are able to maintain the trend previously mentioned (institution + culture à global entrepreneurship). There are two ways in which Multinationals try to maintain the beneficial trend for United States and Western Europe: (a) Exploitation of other nation’s resources, and (b) Capturing knowledge.

Multinationals have not only maintained the trend in favor of United States and Western Europe, but also have impeded new entrants. Developing countries are playing catch up for the past centuries with respect to developed nations. Nevertheless developing nations are taking advantage of these differences. An example would be the exploitation of banana growers in Colombia and Guatemala (United Fruit Company in Guatemala) in the 19s. Nowadays multinationals are behaving more friendly towards their hosting nations because of strict regulation and a change in culture. Nevertheless in the beginning of globalization, multinationals were created to create value for their shareholders despite the outcome of hosting nations.

Additionally, by creating wealth for United States and Western Europe, their multinationals were able to capture the best knowledge available in the market. Multinationals are the source of knowledge. The Research & Development (R&D) of some multinationals is higher than a lot of developing countries. Over the last decade 10 countries accounted for 87% of world R&D, and 90% of business R&D All are developed, except China and Korea. R&D is the least internationalized segment of multinationals value chains[v]. By having similar trust-worthy institutions combined with excellent human capital, multinationals were able to reinvent themselves and create new wealth (Multinationals as Engines of Growth). A clear example of this is that multinationals in United States and Western Europe have been helped by their own country to avoid bankruptcy (i.e. Ford or GM).

Other countries have been trying to participate in this virtuous cycle of creating multinationals that can promote knowledge and wealth that would help create more multinationals (i.e. Brazil at the wheel). Nevertheless, the real shift would be provided when multinationals realize that by transferring technology across the world would improve the overall future of all of us (i.e. Cisco Goes to China: Routing an Emerging Economy)

[i] Referring to people from United States and not people from the Americas.

[ii] Referring to people from United States and not people from the Americas.

[iii] Referring to people from United States and not people from the Americas.

[iv] Referring to people from United States and not people from the Americas.

[v] Entrepreneurship and Global Capitalism Course by Geoffrey Jones

Multinationals: Stealing from the Poor to Give to the Rich?

2007-03-11T00:00:00.002-08:00

Latin-Americans always voice their disgust when multinationals come to invest in their country. Most of these people think that multinationals only come to rob their country of its natural resources leaving only devastation and poverty in their wake. This perception is based on past experience and in some ways they are justified in their complaints. Most of the multinationals that have come to our countries in the past have, indeed, only left behind further impoverishment and, in some cases, diseases.

My opinion, however, differs in that I believe that this initial misconduct has been due to the fact that there was not sufficient governmental regulation to encourage a fair process of negotiation. After a hundred years of experience, we can no longer continue to blame these companies. Now, the fault lies with our own governments, and if these are corrupt, then the fault lies with us.

At a time when the United States was coming into its world power status, at the beginning of last century, a lot of entrepreneurs embarked to conquer the world. In a similar fashion as our past conquerors, these entrepreneurs where looking for land and other factors of production. A very particular case is that of the United Fruit Company (UFC) in which they were looking for land to grow bananas. The UFC exploited many countries if for no other reason than, simply, because they could. Local governments also needed to industrialize and the UFC gave them the infrastructure in exchange for a proper environment for their business. In terms of control and coordination, the UFC exploited local workers offering them the minimum survival conditions. However, it wouldn’t be unreasonable to say that the UFC also gave aid and certain benefits to the local communities where it was placed (i.e. hospitals and schools) but the damage to the workers was far worse. This lack of control was in part due to the lack of power in the government. These governments didn’t have many options. They needed to modernize and didn’t have the money or the technology or the resources to do so. They were, thus, forced to sell themselves to the highest bidder.

Toward the end of the 90s, these conditions changed dramatically. By then, the majority of multinational companies were not only obeying the written laws of the land but also the over arching ethics codes and moral standards. For example, many investing companies from the United States were working within United States’ standards. Others were simply obeying some series of ethical agreements in order to avoid damaging their reputations. Moreover, there were multinationals that were pioneering change in the area of ethics and standards in the countries that they were operating in, making an effort to balance the conditions’ inequalities

In Latin-American countries this hasn’t been much different. Multinational companies that invest in Latin America must comply with very strict standards that prevent workers from the mistreatment that we saw in 1990. Even then, in many cases, we see the same results as we did in the past. Why does this keeps happening? Are the multinationals the problem or is it something else? A potential example is in Barrica in Chile where there is a group of people that are against the over-exploitive mining expeditions by the Barrick Company on the border of Chile and Argentina. The reason for their objection is that it is believed that the environmental effects are more important that the any economic rewards that the project would bring. If this project were to go forward it could in danger the glaciers in the area which could have devastating effects to the supply of water for various communities in Chile. There has been some governmental response in Chile, mandating that Barrick analyze the environmental effects, but the critics say that this is not sufficient. They do not mention, however, the potential positive effects that this project would create (an estimated 5,500 jobs.) Still, this reaction is understandable given the history of multinationals in the region. Unfortunately the problem is no longer the multinationals. They are entities that have the objective of maximizing profits for their shareholders. The real problem is that the government lacks presence or control in these situations. In this case, the Chilean government didn’t even think there was a problem. I realize that there may exist a group of experts that are able to analyze the environmental effects and decide on the best solution. For the rest of Latin America, this solution is more complicated.

Unfortunately our experience in Latin America has been tainted by corrupt governments and has usually ended up damaging the country. Many people, motivated by the effect of incredible inequality, believe that the cause of all of this is capitalism and imperialism on the part of United States. Capitalism isn’t really the monster that it is made out to be, per se, but what is bad is that the local government, which should be acting as a coordinator of the process, is only looking out for its own interests. In theory the government is the mediator between the capitalists and the established society. It is the government that has the manpower and the obligation to manage the assets of its nation. With this it serves as the system of checks and balances in interactions between multinational companies and the local businesses.

An example of this is Botswana, an interesting case that has received little coverage in Latin America. Botswana was poorer than Ecuador in the 70s. However, during the last three decades, Botswana has had an annual growth of 9%-10%. Poverty indexes have been decreasing drastically (only 30% below the poverty line) and the GDP per capita has increased over Ecuadorian levels (now in $11,000 PPP in comparison to Ecuador in $4,500 PPP purchasing power parity) This is all the result of excellent coordination, control and resource management done by their government. During the 70s, DeBeers, the largest diamond multinational exporter company in the world, invested in one of the mines in Botswana. In this case, however, in contrast to what happens in Latin America, the local government was able to negotiate the suitable contract and to manage the natural resources in a intelligent way. Botswana was able to eliminate the desperation that existed; they took the capital and invested it in a development plan. (DFI – Direct foreign investment). This kinas of measures bring long term development, but they can also destabilize the country in the short term. In the case of Botswana, its citizens were willing to be patient and to avoid the chaos that would destabilize the government.

Unfortunately, in our countries, this is different. Most of the chosen governments only focus on the short term (or at least that is what it seems). They think they are doing the people a favor when they try to redistribute wealth, nationalize corporations and close the doors on foreign investment. Our economies do not produce enough to maintain our growth pattern. If we want to isolate, we will never be free poverty. If we want to grow, however, we need to be open to foreign trade, generate foreign investment and use our resources to educate our people so that the generations to come have greater factors of production to work with. Our countries need the financing that only foreign investment can give us. It is crucial that a mechanism for wealth redistribution is explored (like the one working in Sweden, were there are over 70% in taxes depending on ones income), but also, it is important to generate wealth through new policies that encourage exports (like the case of South Korea and Singapore)

Unfortunately, we keep blaming the United Status, and their multinationals, for our own problems. The problem is internal. The history of Latin American politics has been deeply scarred by corruption. Our society is infested by corrupt people and the fact that we welcome it does not make it any better. Everyone, from people we know from school to co-workers, everyone practices corruption and we brag about it. That is the main root of our problem. If we had a government branch that was in charge of controlling corruption (even in high executive positions), we might have a chance. However, we need the institutions that support the greater benefit of the majority; we can’t expect that this is going to be achieved with some profits that help a few.

We need a president that is truly connected to his country. We need a president that will attempt to solve the problem of poverty by creating social programs and by developing the nation’s financial assets through open economic policies (most likely capitalist ones). We need a consensus that allows the government to do its job and that has the patience to allow these policies to run their course and bring benefits in the long term.

Co-Authors: Maria Teresa Burbano & Marcelo Burbano

Why American foreign policy begins and ends with the President of the US?

2007-02-11T00:00:00.001-08:00

As a new president takes office, he usually rides a wave of momentum from the mandate he received in the November election. This gives him a brief ‘honeymoon’ (typically 100 days) to push many of his domestic campaign promises through Congress. Reagan did this successfully with his tax cuts in 1982, despite a heavily Democratic Congress. Bush passed his Education act “No Child Left Behind” on his 3^rd day in office. However, as any married person can attest, all honeymoons come to an end. Congress returns to its business-as-usual self that is fraught with petty partisanship, pork-barrel legislation (which is a law that garners money and/or infrastructure projects for a Congressman’s home district, such as a new 10-lane bridge in small town, Kansas), and the perpetual re-election campaign (House of Representatives are elected every two years).

So, where does this leave the President? As Congress reassumes its control over the domestic agenda, the President is left looking outward toward foreign policy. This is the area in which over the next 2 to 6 years, if re-elected, where he will enjoy the most room to manage and affect policy. He appoints the Secretary of State, the Secretary of Defense, and the CIA director. This is his domain where he can act unfettered. Congress does have to approve the ‘extended’ use of force but in general it has been the tradition of Congress to leave foreign affairs to the executive branch. In fact, this tradition was born in the drafting the Constitution, and a partial reason for the creation of that document.

This is where the cruel irony begins. While a president can affect the most change in foreign affairs, this is the area where he is the least versed. The past 4 out of the 5 US presidents were state governors immediately before assuming the Oval Office. Simply put, this meant that they don’t have a clue about foreign affairs upon assuming office. They spent their governor years worrying about education in Jerusalem, Ohio and tornadoes in Paris, Indiana…and rightly so. This paradox is unambiguously detrimental to the American people and to the world. No doubt, this inexperience caused JFK’s misjudgment to go ahead with the Bay of Pigs invasion in 1961 and contributed to George W’s sheep-like susceptibility after 9/11 to neocons such as Cheney and Wolfowitz (9/11 occurred only 8 months Bush’s inauguration).

The only non-governor president in the past 5 was George H. W. Bush (Bush I), who previously served as VP and CIA director, and he was wildly successful in foreign affairs. He marshaled together an unparalleled international coalition in the first Iraq campaign. No doubt, he leveraged his previous executive branch experience. Ironically enough, his success abroad arguably cost his reelection at home in 1992 against Bill Clinton.

This leads us to the cruel irony #2 about the American presidency. While the president can impact the most change abroad and the least at home, he has historically been held accountable by the US citizenry for the opposite. Looking back at the past 30+ years, the incumbent president or VP has only been unseated due to economic downturns (Ford, Carter, Bush I) or scandal at home (why Gore didn’t win in 2000 and Nixon with Watergate). LBJ (Johnson) was the last president not to run for reelection based on a foreign issue, Vietnam. Can the President control the economy? No. Besides natural economic cycles, fiscal policy (tax cuts, hikes) must be passed through Congress, which as we saw earlier is tough for a president to manage. Monetary policy is governed by the federal reserve, whose governors are elected to 14 year terms, which restricts any one president’s influence. So, the president finds himself utterly responsible for an outcome that he can’t control.

Conversely, Americans, like Congress, give the benefit of the doubt to the President concerning foreign affairs. This deference stems from the American tradition of isolationism, both sociological and geographical. I believe this is why Americans voted Bush back to office in 2004. We don’t like to change leaders in the middle of a war; at least until we are damn sure it is wrong. Unfortunately, we weren’t at that point as a nation back in 2004.

In summary, my hope is not to dissuade you (i.e. business leaders) from improving US foreign policy, but to only highlight the vast influence the US President holds over American foreign policy. Indeed, a change of leadership can make a marked difference in US foreign policy (or at least its tone).

Thus, my action item is to elect a new president in 2008 that espouses:

Sincere contrition to the world for its misjudgment in Iraq and its insensitivity to all involved. There is a myth that the world superpower will look weak if he recognizes ‘enemies’ such as Iran and Syria by talking with them. My bet is that only good could come from this. The US still can boast a $420 billion defense budget (more than the rest of the world combine) and an economy that can kick anyone’s ass (GDP $12.6 trillion; the #2 is Japan with $4.6 trillion). Talking and understanding does not automatically mean legitimizing or approving (B. Hall taught us this).

A humble yet firm posture in other world affairs (i.e. Iran, North Korea). Like Ricardo and Nico said tonight, rebuild and bolster international institutions and take on ‘low-cost high benefit’ initiatives like AIDS in Africa. In short, rebuild the goodwill and win back the hearts and minds of the world. ‘Remind’ them about the best of

America

…its ideals and values.

A leadership role in nuclear nonproliferation. The

is clinging to the moral high ground here, and can easily reclaim it by ceasing all developments of new nuclear weapon designs, such as nuclear bunker busting bombs. For god’s sake, the benefit of these such developments can by no means outweigh the costs to international goodwill and/or trust. On such an important issue, we must be fervently consistent. The easiest way to prevent a nuclear catastrophe is preventing the bombs from being created in the first place. Indeed, as one moves from enriched uranium to warheads to border security it becomes exponentially more difficult to defend against.

By Tim Heis

Comparing Patagonia Ltd. to other environmental companies

2007-01-11T00:00:00.000-08:00

The key of Patagonia’s success is the correlation between high quality product and environmental concern. Patagonia concern for the environment has required its product to innovate. Patagonia has been able to recover some of this environmental cost through product differentiation (high quality), private cost savings (better processes), and strategic behavior (low turnover and close suppliers relationships).

A key characteristic of Patagonia is the fact that its shareholders believe in sustainable development. Its shareholders are more worried about not harming the environment that about the financial returns of the company. By choosing not to grow fast, Patagonia has impeded the proliferation of bad management practices that would probably damage the environment in exchange for financial returns. This pre-requisite is necessary for any other company to be able to successfully implement Patagonia’s approach.

Among all the cases studied, there wasn’t anyone that has such a virtuous circle that takes advantage of the benefits of the environmental concerns. Nevertheless, Patagonia’s approach could be extrapolated to other industries in similar spaces. I believe it could not be extrapolated to firms that exploit public goods directly. For example, AES would have some problems adapting Patagonia’s approach. Even though AES could create better dams through innovation, its user wouldn’t pay more because its product cannot be differentiated. Then AES wouldn’t be competitive. Without product differentiation the companies can only recoup the environmental cost through privae cost savings and strategic behavior. On one side profit from strategic behavior is the most difficult approach to recoup environmental cost. On the other side better innovated process are difficult in industries that invest heavily in R&D. In the case of oil or infrastructure related projects unless the company integrates forward to the end-user, it would never commands better prices. In the case of Patagonia, cotton suppliers were able to have a premium because they worked close with Patagonia to create innovative fibers.

Companies that want to pursue Sustainable Development need to recover the environmental cost using the three methods mentioned above. Any company that has only one possibility to recover environmental cost is doomed to fail. Companies need to create synergies between these approaches to be able to maintain their competitive advantage.

It is clear that an industry that can’t create differentiation between the participant’s products is not incline to pursue a sustainable development approach. Companies in that industry would only be able to pursue a sustainable development approach with help of the government or a collaboration between all the members of the industry.

Example of Sustainable Development: Patagonia

2006-12-11T00:00:00.001-08:00

Sustainable development is characterized by having a process that produces for this generation without affecting the next generation’s outcome. It is important not to confuse between sustainable development and environmentally friendly approach. An environmental commitment could be included in sustainable development but not vice versa. Patagonia is making significant contribution to not harming the environment but on the sustainable development front it could do much more.

Sustainable development covers three main areas: raw materials (i.e. energy), environment (i.e. pollution) and social impact.

In the area of raw materials, company should focus on developing supply of renewable energy and natural resources. For example Patagonia (the clothing company in the U.S.) is working in most of its retail stores to be able to implement a renewable energy approach. Nevertheless there is no evidence that is requiring the same from all its suppliers. Patagonia could fall in the same trap as automakers, where most of the damage is caused by chain reactions due to the company’s existence than from the company’s processes. Nevertheless, Patagonia is working with recycled raw material and its suppliers to avoid damaging the natural resources. In terms of water, there is no evidence in the case that Patagonia is doing anything.

In the environment front, Patagonia spends more than $2.4 million in its environmental commitment. Patagonia commits 1% of its sales to environmental grants programs, non-cash donation, company campaigns, and other programs. Patagonia also provides for the promotion of environmental activism and helps its partners along the supply chain to improve their environmental front.

In the social impact front, Patagonia is not doing much. Patagonia spends a lot of money supporting a paternalistic approach with its employees but it doesn’t invest on the communities that are providing for the raw materials. Sustainable development requires the communities that produce Patagonia’s raw material to exist for the next generation. Patagonia needs to understand that by buying raw materials from this communities it is affecting their future. There is no evidence in the case, but Patagonia suppliers partners could be paying to low to their communities. Patagonia guarantees that its partners are in a win-win situation but it doesn’t guarantee well behavior down in the supplier’s chain.

In general Patagonia is doing a lot for the environment and to maintain sustainable development. Nevertheless there are still certain areas where it can improve. For example making sure that the supply chain believes in sustainable development and takes action to correct for mistakes.