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

[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

[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

[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

[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

[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 Roberts)

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)

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

[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

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.

Evolving Learning itself to what we learn on how to teach English language

English language learning has evolved in several decades from teaching it as a subject to teaching as a tool in other subjects. Now, can we do the same with other subjects? Can we try teaching our children finance to reinforce mathematics?

Here is something that I found from Peter Watson, author of "Ideas - A History of Thought and Invention, from Fire to Freud": "Instead of learning in school, say the relativity theory or electricity, we should actually be taught it as it happened to the people who discovered it, with all the rivalry, the dead ends and the blind alleys. By doing so, it becomes much more interesting and you don't only have the abstract knowledge what electricity is, but how people came first across the idea of electricity"

Interesting enough the best business schools in the world teach their students through business cases. Can we bring this same methodology to the K12 classroom?

M&A and Religion

In the book "Ideas: A History of Thought and Invention, from Fire to Freud," the author Peter Watson reveals how religions have been consolidating rituals and customs of other religions to convert believers into their own religion.

The book touches on thousands of historical facts but the one that interested me the most was the fact that the religions of today are based in past beliefs from older religions. Even more astonishing, we celebrate rituals todays that came from old celebrations from religions around the world. Those old celebrations are based in certain cases to a physical event (e.g. solstice) and not to the historical facts that are religions try to sell us (e.g. birth of Christ).

The consolidations of beliefs and celebrations into very few religions nowadays makes me belief that the first industry to be consolidated in the world was relgion. The first consolidator and "multinational" was Catholicism.

Don't blame the oil 'speculators'

[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

[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

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

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

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

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

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

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)

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[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

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.

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

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

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[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)