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- THE FRIDAY LETTER -
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| http://www.gilder.com/ | Issue 366.0/December 19,
2008
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HEADLINES:
- Book of the Month / The Bernard Madoff Morality Tale
- Friday Feature / How Techno-Creativity
Will Save Us
- Friday Blogger Bonus / Surplus, Scarcity and the iPhone App Store
- Readings /
The Week / The Bernard Madoff Morality Tale
Andy Kessler, Forbes.com (12/16/08): Why,
Bernie, why?
By all accounts, Bernard Madoff had a successful trading
business and was a hitter on Wall Street. Bernard L. Madoff Investment
Securities was one of the top three market makers in Nasdaq stocks, had over
600 brokerage clients and claimed to often contribute 10% of New York Stock
Exchange trading volume, usually after the 4 p.m. market close.
So why, inquiring minds want to know, did he perpetrate
the largest fraud ever on Wall Street, some $50 billion? He had it made, so why
risk it?
Well, for starters, if you leave the Tri-State area, very
few people know what a market maker is. At the Palm Beach Country Club or the
Boca Rio, the preserved specimens at cocktail parties know about cement or
paper plants; their brokers at Merrill (or maybe Goldman) are their only ties
to Wall Street.
"And what do you do?"
"I'm the third-largest market maker of …"
"Oh, my drink is empty."
Madoff was just another schlub ("worthless oaf" for you
Yiddish-challenged) from New York with money. Get in line. Schlubs are a dime a
dozen in the Sunshine State, contributors of hanging chads and everything.
So Madoff got the brilliant idea to start a money management business on
the side. He didn't charge any fees, explaining that he would just make money
trading stocks on the securities side of the business. Merrill
Lynch and every retail brokerage player perfected this business
model years ago--it's called churning.
And the gerries fell for it. Now, all of a sudden, Madoff is a macher (a
big shot, a mover). The ability to make someone money moves you to the top of
the cocktail-party list. Madoff didn't advertise; he kept it exclusive, adding
to its mystery and allure. And he didn't swing for the fences, he
"produced" tortoise-like (steady) returns: 13.72% one year, 9.82%
another. Goldilocks-esque. Not too hot or cold, just right.
It became known as the "Jewish T bill." Never mind that his
option split strike conversion strategy was completely bogus. As everyone on
Wall Street should know, you can limit the downside or enhance the upside, but
not both--and certainly not for free. There are too many market makers--hey,
like Madoff Securities--who will clip you for trading fees and risk premiums
for a strategy like this to ever work. It's like putting $10 on red and
on black at a roulette table. You win every time, except when 0 or 00 come up,
which they do once every 19 spins.
But still, that doesn't explain the fraud.
OK, Madoff has left us some hints as to why. The first clue is that there
isn't $50 billion sitting in some numbered Swiss bank account. In fact, it
probably isn't a $50 billion fraud. There seem to be lots of problems with
Madoff and numbers. The only facts we know are the claims of $17 billion in
assets in his money management business, according to his filings with the
Securities and Exchange Commission.
The market is down 40%, so perhaps there should be $11 billion left. Some
of his customers, mainly hedge fund-of-funds and European banks, would use 3:1
leverage to magnify Madoff's "steady" returns, hence the $50 billion
claim. If you're going to go down, you might as well go big and get something
named after you. Why should Ponzi keep hogging the limelight?
So as far as we know, he didn't steal the $50 billion/$11 billion--he
probably just lost it. He might have built a trading powerhouse, but he was
god-awful as an investor. It happens all the time (Bear Stearns, Lehman Brothers, Citigroup,
Morgan Stanley, yadda, yadda, yadda …)
My guess is that this is what went down. Even though
Madoff Securities was on the leading edge of automated trading, the business
itself was becoming less and less lucrative. Everyone had the same computers.
Spreads, the difference between the bid price and the ask price that became
Wall Street trading profits, began shrinking. And the move to list stocks in
penny increments instead of eighths (12.5 cents) whacked trading desks all over
Wall Street.
So you make it up in volume. Beyond cocktail parties,
Madoff really created the money management business to feed himself trades. But
his strategy was garbage. He absolutely bombed as a money manager, but he
desperately needed the assets under management to feed his trading operations,
so he started to make the numbers up….
Continue Reading on Forbes.com: http://www.forbes.com/opinions/2008/12/16/madoff-fraud-investments-oped-cx_ak_1216kessler.html
|
The Gilder Telecosm Forum To
learn how to join this powerful network of talented, tech-savvy investors and
thinkers online daily to debate, discuss, and decode new and emerging
technologies and share valuable and actionable investment advice, visit www.Gildertech.com today. |
Friday Feature / How Techno-Creativity Will Save
Us
Bret
Swanson, Forbes.com (12/12/08): As a new president contemplates
his agenda amidst a deep recession and global financial crisis, he should
remember his best friend: innovation. The combination of technology and
entrepreneurial creativity drives all real long-term growth. But today market
volatility pushes our panic buttons, and short-term hysterics unlock the vaults
of the Keynesian kingdom. In these uncertain times, we forget just how far and
how fast the world moves. And how many crises innovation transcends.
Think back, for example, to the last Democratic transition, when Bill
Clinton ascended to the Oval Office in 1992. It was only 16 years ago, but it
nevertheless offers a gauge for the pace of change. The Soviet Union had just
collapsed, Apple Computer was in the
doldrums versus the Windows juggernaut, and that other unstoppable force, Miley
Cyrus (aka "Hannah Montana"), had just been born. The Internet was
but a blip to most Americans, as were real coffee and wine. There was no
"genome," and there were no digital cameras. The "Facebook"
I received as I arrived for my freshman year of college that autumn was printed
on paper and played no part in the presidential campaign.
Today, an average consumer can buy a terabyte hard drive (1 million
megabytes), on which she might store her family photos, videos and other
digital documents for as little as $109.99. In 1992, a terabyte drive, if such
a thing had existed, would have cost $5 million. The chief digital storage
medium at the time was the 3.5-inch floppy disk, which held 1.4 megabytes. When
digital photos came along and consumers found the huge square disk could only
hold one photo, it was instantly obsolete.
In mid-2008, the four-gigabyte (or 4,096 megabytes) flash memory chip in an
iPod Nano cost $25. Late in 2008, four-gigabyte flash cards and USB drives are
selling for $14.99. But back in 1992, four gigabytes of flash memory would have
cost $500,000. This means a hypothetical iPod Nano circa 1992 would have set
back the teenage Nirvana or Boyz II Men fan around $3 million.
Apart from research scientists and a few early adopters of Compuserve and
AOL, the Internet essentially didn't exist in 1992. Monthly Internet traffic
was four terabytes. All the data traversing the global net in 1992 totaled 48
terabytes. Today, YouTube alone streams 48 terabytes of data every 21 seconds.
Biology is also on the innovation curve and is likely to accelerate. When
the Human Genome Project began in the early 1990s, sequencing one DNA base pair
cost about $10. Craig Venter famously began his own competing genome search in
1998 and completed the project simultaneously, at around one-tenth the cost.
Today sequencing one base pair costs a tenth of a cent, and by 2024--just 16
short years from today's presidential transition--we'll sequence an entire
human genome (yours, if you'd like) for $100.
In 1992 a tiny percentage of Chinese citizens had ever made a phone call,
but today there are twice as many mobile-phone subscribers in China as there
are people in the U.S. The entirety of U.S.-China trade in 1992 was $33
billion. This year it will approach $400 billion. Trade with India in 1992 was
just $5.7 billion, but is now $35 billion. All world output in 1992 was $20.4
trillion, about the size of today's output from U.S., Japan and Germany.
Imagine the rest of the world didn't exist. That was 1992.
Comment on this story on
Forbes.com:
http://www.forbes.com/opinions/2008/12/12/innovation-autos-bailout-oped-cx_bs_1212swanson.html
__________________________________________
Friday Blogger Bonus / Surplus, Scarcity and the iPhone App Store
Mark Sigal, O/Reilly “digitalmedia” blog (12/17/08):
George Gilder once pointed out that when the availability of a given resource
shifts from scarcity to surplus, a lot of wealth is created. In the technology
realm, one can think of processing power, storage and bandwidth as the great
“wealth exponential-izers” of first the PC era, then the Internet era, and now,
the Mobile Broadband era (as these resources went from scarcity to surplus
items).
Beyond wealth
creation for entrepreneurs, part of the miracle of surplus-powered markets is
that they are generally a great boon for consumers as well, yielding them a
greater diversity of offerings to choose from and democratizing markets by
broadening accessibility and lower relative product costs.
By contrast,
scarcity markets are kindred spirits of the toll road; they are all about
pricing controls, and limiting both choice and access (think: cable/satellite
TV, gas-powered cars, etc.).
While the entrenched
incumbents understandably love scarcity markets, surplus markets are the
proverbial rising tide that lifts all boats for consumers and upstarts alike.
iPhone
Developer Success Stories: Not Everyone is Happy
It is with this
backdrop, that I felt compelled to say, “Get a life” to some of the commenters
to the post, ‘iPhone Developer
Success Stories’ at MacRumors.com.
Why? The basic
upshot of the piece was to share a couple of success stories of how small
developers were/are creating multi-million dollar business successes on the
backs of the iPhone 2.0 Platform (which powers both iPhone and iPod touch) and
its tightly coupled App Store marketplace.
Consider the
heartening story of Pangea, a long-time Mac developer, who was able to parlay
several of their existing titles into popular iPhone apps, catalyzing a $5M
business this year, and more income in just four and half months from iPhone
apps alone than in 21 years of writing for the Mac…COMBINED!
Needless to say,
Pangea’s Brian Greenstone is now dedicating his company fulltime to the iPhone,
cheerfully noting, “Some kid in his bedroom can literally make a million bucks
just by writing a little app."
Ah, but this
story of true “overnight” success was treated with more than a trifle number of
complainers about how such stories of "fools gold" would only lead to
more crap apps (actually, that’s the Pull My Finger app), lowering the quality,
increasing the noise, making it harder for the little guy to make a buck..wah,
wah, wah, wah!
Get a
Life, Okay?
So let’s agree
that most iPhone App developers won't become millionaires from the App Store
marketplace, just as most devotees of the eBay economy didn’t either, but let’s
also get a clue. What was the better alternative before…?
Read on:
http://blogs.oreilly.com/digitalmedia/2008/12/surplus-scarcity-and-the-iphon.html
__________________________________________
Readings /
Auto Makers Get $17.4 Billion
http://online.wsj.com/article/SB122969367595121563.html
Bandwidth, Storewidth, and Net Neutrality
http://techliberation.com/2008/12/16/bandwidth-storewidth-and-net-neutrality/
Where is Steve Jobs
http://blog.wired.com/gadgets/2008/12/where-is-steve.html
Google Pushing Users Away From IE?
http://www.techradar.com/news/internet/google-pushing-users-away-from-ie--496216
Paper-Thin Speakers Made From
Carbon Nanotubes
http://www.spectrum.ieee.org/dec08/7070
Tech to Put Under the Tree (Technology Review gift ideas)
http://www.technologyreview.com/business/21903/?a=f
__________________________________________
Friday Letter Editor: Mary Collins George / mcollins@gilder.com
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