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The internet bubble

25 July 2009

The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than potfueled ideas scrawled on napkins by uptoolate bongsmokers were taken public via [Initial Public Offerings (IPOs)], hyped in the media and sold to the public for mega-millions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.

- Matt Taibbi

How was this bubble created? Remember the four elements from yesterday’s post:

An Intangible Market. The internet, which really is just a bunch of interconnected electronic circuits whose use might somehow produce money for the user, was the ultimate intangible market.
A Broken Rule. Prior to the internet bubble, there was a long-standing rule concerning which companies were appropriate for IPOs. The company had to have been in existence for five years and produced a profit for three consecutive years. Near the end of the internet bubble, tech IPOs were being initiated for companies that had never made a profit and would not make a profit into the foreseeable future.
An Insider. The investment bank offered executives sweetheart deals for IPO shares resulting in money being diverted from the company’s bank account to the CEO’s and CFO’s bank accounts. In return the investment bank was promised additional business.
A Hedge. As the facilitator of an IPO, an investment bank earned a commission on the amount of money it raised. The big risk for the investment bank was that it wouldn’t be able to dupe people into investing enough in a shaky IPO.

Goldman Sachs and the “free” market

24 July 2009

In my first blog post, I questioned whether investment houses might create a new speculative market by betting on the outcomes of lawsuits much the way they encouraged betting on mortgage-backed securities. In certain respects, that post now seems out of place in a blog devoted primarily to education issues. I, however, always intended to return to the general subject of market speculation, and Matt Taibbi’s masterful undressing of Goldman Sachs in the latest issue of Rolling Stone gives me a wonderful opportunity to do that.

While some of Mr. Taibbi’s language is a bit risqué and he singles out Goldman Sachs when other financial services firms are guilty of the same or similar practices, I encourage you to set aside all prudish compunctions and read Taibbi’s article from beginning to end. Indeed I predict that many of you will be spouting his colorful expletives freely by the time you finish.

Before doing so, however, reflect on the news from Wall Street last week. One after another, banks and investment houses announced large profits in the midst of the largest financial meltdown since the Great Depression. Leading the way was Goldman Sachs, which reported a $3.44 billion (that’s “billion” with a “b”) profit in the second quarter, followed closely by JPMorgan Chase with a $2.7 billion profit. ”One theme here,” said former Clinton Administration Labor Secretary Robert Reich in The New York Times, “is that Goldman Sachs and JPMorgan really emerged as the winners, as the last of the survivors.”

What is the recipe for Goldman Sach’s success, according to Mr. Taibbi? Consistent with all illicit money-making schemes, there are four elements:

An Intangible Market. It’s difficult to defraud someone when he or she is paying you cash for a widget. Either you have the widget or you don’t. Either the widget works or it doesn’t. Not so with markets for intangibles, which can come and go like a magician’s rabbit.
A Broken Rule. Contrary to popular belief, there is no new money-making scheme under the sun. Every scheme has been tried in one form or another before. As a result, there generally are rules in place to prevent the most significant abuses from occurring. These rules must be broken.
An Insider. It helps to have someone who gets a better deal than everyone else or has a special relationship with you. Every money-making scheme needs champions. This is why Ponzi schemes are so successful.
A Hedge. The savvy investment house always positions itself so that does not get harmed when the bubble bursts.

The lessons to be learned from the internet, housing and oil bubbles are so important that they need to be examined in detail. But first a tantalizing trinket: How much did Goldman Sachs pay to this nation in taxes last year? $14 million (that’s “million” with an “m”), or about 1/3 of what the company’s CEO made.

The take-away: Free markets are only “free” for companies like Goldman Sachs who are “too big to fail.”

Heartbreak of psoriasis

23 July 2009

Yesterday WSAZ-TV reported on Kinetic Park in Huntington. As originally envisioned, Kinetic Park was to be a technology park closely connected to Marshall University. Today only a dermatologist’s office and an accounting firm reside on the upper level of the site. Surrounding them is the West Virginia equivalent of sagebrush.

The strangest part of the WSAZ story concerned site infrastructure. Dr. Susan Touma, the on-site dermatologist (an anchor tenant for nerdy technology types?), told the reporter: “We had phone lines put in and a lot of different other things that weren’t in place.” WSAZ went on to report that contractors were just laying cable for TV and high speed internet access yesterday. How on earth can you claim to have a technology park when you don’t even have high speed internet access available on your site? I had always assumed that Kinetic Park had not succeeded because of the lack of needed entrepreneurial talent in Huntington. Now I learn it may have been the lack of internet?

Before anyone in Morgantown laughs about the plight of Huntington’s Kinetic Park, please take a tour of the West Virginia University Research Park on Route 705 in what otherwise is a booming area of Morgantown. According to a November 2002 WVU press release about the Research Park, then Vice President for Research John Weete said: “It is fully expected that the WVU Research Park will become a self-sufficient, cost-effective, world-class center of research, technology development, commercialization and business activity resulting from strong links between the park occupants and the intellectual capital of WVU” … in “multi-tenant buildings totaling approximately 650,000 square feet of space.” This quote is not intended to be a clue to help you locate the site. All I can say is: Look for the West Virginia equivalent of sagebrush. If any place has the sagebrush market cornered, it’s West Virginia University’s Research Park.

As someone will surely tell me, the heartbreak of psoriasis is no laughing matter. We need to figure out why Kinetic Park, WVU’s Research Park and the Dow Technology Center in South Charleston are in their present conditions and what, if anything, we might be able to do to change it.

Health care reform: Pay per patient or pay per service?

22 July 2009

Last week the Massachusetts’ Special Commission on the Health Care Payment System issued a report that should inform discussion of health care reform. In 2006 Massachusetts became the first and only state to attempt to provide universal health coverage for its citizens. Since that time, the state has been struggling to pay for it. Last year, in fact, reports the New York Times, the state took a number of actions to balance the program’s budget, including approving an assessment on insurers and hospitals, raising penalties for businesses that do not cover workers, increasing premiums and co-payments and raising the state’s tobacco tax; and this year the program faces another $250 million deficit.

So what is the Special Commission recommending? Replacement of the current fee-for-service system with a global payment system. Under the current system, a doctor receives a payment for each service that he or she provides, which incentivizes providing more treatment than is necessary. Under the proposed new system, networks of health care providers would receive a flat fee for each person in the network, regardless of whether that person only received an annual check-up or spent months in the hospital recovering from a serious illness. The notion is that the latter approach will encourage preventative care and discourage overtreatment.

There would be many challenges with making such a conversion. How do you ensure that all networks have comparable participants or that those networks with higher risk participants receive extra compensation? How do you ensure that networks don’t cut corners, especially with dying patients, in order to maximize profit? How do you determine what the initial per-participant compensation rate should be and the rate at which it should increase over time? What impact might such a system have on innovation in a state with some of the best academic medical centers in the country?

Even so, I think the Special Commission is on to something. The proposal may not be perfect, but it should receive serious consideration.

The game of charades

21 July 2009

As anyone remotely familiar with higher education job searches knows, searches for top positions often are rigged. Generally, this is done by stacking a search committee with people who will support a particular candidate and/or railroading a candidate through a divided search committee because the rigger knows he or she has the votes.

Knowing how searches usually are rigged, I must admit to utter and complete bafflement concerning the process used to hire Mike Hamrick as Marshall University’s new athletic director. My hunch is that the search was not rigged, but I have no explanation for the unusual chain of events.

President Stephen Kopp made a big splash a few months ago by announcing a top-notch search committee consisting of board members, faculty and community leaders. Then he apparently decided to ignore them. According to Huntington Herald-Dispatch reporter Chuck Landon, President Kopp and two unnamed search committee members traveled to Texas and interviewed the finalists and decided to hire Mike Hamrick without consulting with the full search committee.

Four observations:

If you are trying to guess the number of jelly beans in a jar, use the average guess of a large group of people rather than relying on your own guess and you’re more likely to win. The same rule applies to hiring.
It’s a big mistake to pretend that someone’s opinion matters when it doesn’t. Nothing demoralizes people more. And Marshall University doesn’t need any more demoralized people.
Every person I’ve ever seen hired through a flawed search process has struggled in his or her job. This does not bode well for Mr. Hamrick or Marshall University athletics.
If Mr. Hamrick does struggle, there won’t be a search committee to blame for a bad hire.

22 July 2009. Further reading: Las Vegas Sun article on Hamrick’s departure.

The internet bubble

Goldman Sachs and the “free” market

Heartbreak of psoriasis

Health care reform: Pay per patient or pay per service?

The game of charades

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